SEP     7    19M 


BRIEF  AND  REPLY   BRIEF 

SUBMITTED  ON  BEHALF  OF  THE 

NEW  YORK  STOCK  EXCHANGE 

TO  THE 

^xi  Smiktng  anb  Olurrrttry 

MARCH  5,  1914,  AND  MARCH  30.  1914,  RESPECTIVELY 


With  the  Compliments  of  the 


r-^ 


'^^^^^IfOBHii 


OF  THE  UNITED  STATES  SENATE. 


In  the  Matter 

OF 

Senate  Bill  3895  entitled  a  bill  "  To 
prevent  the  use  of  the  mails  and 
of  the  telegraph  and  the  telephone 
in  furtherance  of  fraudulent  and 
harmful  transactions  on  stock  ex- 
changes." 


BRIEF  ON    BEHALF    OF    THE   NEW  YORK 
STOCK  EXCHANGE. 

Introduction. 

We  have  discussed  in  a  separate  brief  the  constitutionality 
of  this  bill.  We  propose  to  discuss  the  bill  as  a  practical 
measure  in  this  brief,  assuming  for  that  purpose,  but  for  that 
purpose  only,  that  Congress  may,  under  its  power  to  regulate 
the  mails  and  the  interstate  business  of  telegraph  and  tele- 
phone companies,  compel  the  Stock  Exchange,  within  some 
defined  limits,  to  observe  certain  requirements  as  a  condition 
to  the  transmission  of  its  quotations  through  the  mails  and 
by  telegraph  or  telephone.  To  justify  such  a  bill  it  should 
appear  that  there  is  a  definite  evil  to  cure,  and  that  the  S/) 
bill  is  an  appropriate  and  efficacious  remedy.     These  are  the 

M19487 


2 

concrete  questions  we  propose  to  discuss ;  and  the  task  is  one 
that  truth  and  justice  require  shall  be  executed  in  a  spirit  of 
fairness  and  candor.  That  is  the  spirit  in  which  we  under- 
take it. 

What  is  the  evil  alleged  as  tlie  reason  for  the  bill  ?  In 
the  report  of  the  Committee  appointed  pursuant  to  House 
Resolutions  429  and  504  to  investigate  the  concentration  of 
control  of  money  and  credit,  dated  February  28,  1913,  (which 
we  shall  hereafter  take  the  liberty  of  calling,  for  brevity,  the 
Pujo  Report)  this  is  what  is  said  on  that  subject  (p.  116)  : 

"  But  whether  stock  exchanges  in  their  wholly  local 
and  internal  relations  may  be  regulated  by  Congress  or 
not  where  they  lend  their  facilities  for  transactions 
injurious  to  the  public  interests  at  large  Congress  may 
prevent  any  instrumentality  under  its  control  from 
being  used  to  multiply  and  spread  such  transactions  ; 
and  it  is  its  .obvious  duty  to  do  so.     It   has  appeared 

''  ['  tha^t;  ^^l^sj  of  stocks  on  the  New  York  Stock  Exchange 
average  $r5;5Q0,000,000  annually  ;  that  but  a  small  part 

I  i.'c  •',:ot".  these',  trans^ictions  is  of  an  investment  character; 
'  'that  Whifstano'ther  part  represents  wholesome  specula- 
tion a  far  greater  part  represents  speculation  indis- 
tinguishable in  effect  from  wagering  and  more  hurtful 
than  lotteries  or  gambling  at  the  race  track  or  the 
roulette,  table  because  practiced  on  a  vastly  wider  scale 
and  withdrawing  from  productive  industry  vastly  more 
capital ;  that  as  an  adjunct  of  such  speculation  quota- 
tions of  securities  are  manipulated  without  regard  to 
real  values,  and  false  appearances  of  demand  or  supply 
are  created,  and  this  not  only  without  hindrance  from, 
but  with  the  approval  of,  the  authorities  of  the  Ex- 
change provided  only  the  transactions  are  not  purely 
^_.  fictitious.  In  other  words  the  facilities  of  the  New 
j/jj  York  Stock  Exchange  are  employed  largely  for  trans- 
actions producing  moral  and  economic  waste  and  cor- 
ruption ;  and  it  is  fair  to  assume  that  in  lesser  and 
varying  degree  this  is  true  or  may  come  to  be  true  of 
other  institutions  throughout  the  country  similarly  or- 
ganized and  conducted." 


m 


This  would  be  a  grave   indictment   of   a  great   institution, 
whose  membership  is   representative   of  the   best   citizenship 


of  New  York,  if  there  was  any  foundation  for  it,  which  happily 
there  is  not. 

If  this  statement  stood  alone  we  would  assume  that  the 
bill  was  framed  to  correct  the  evil  thus  alleged  to  exist ;  but 
in  another  part  of  the  report  we  find  the  following  (pp.  114, 
115): 

"  Great  and  much  needed  reforms  in  the  organiza- 
tion and  methods  of  our  corporations  may  be  legiti- 
mately worked  out  through  the  power  wielded  by  the 
Stock  Exchange  over  the  listing  of  securities.  Much 
of  the  confusion  and  many  of  the  defects  in  corporate 
regulation  due  to  the  diversity  of  State  laws  and  to 
the  bidding  of  the  States  against  one  another  in  laxity 
of  administration  in  order  to  attract  corporations 
within  their  borders  may  be  corrected  and  uniformity 
of  metliods  introduced  through  the  listing  department 
of  the  Exchange.  Thus  complete  publicity  as  to  all  the 
affairs  of  a  corporation  may  be  uniformly  enforced. 
The  scandalous  practices  of  officers  and  directors  in 
speculating  upon  inside  and  advance  information  as  to 
the  action  of  their  corporations  may  be  curtailed  if  not 
stopped.  In  short  its  opportunities  as  an  agency  of 
corporate  reform  are  almost  endless  provided  its  own 
practices  can  be  reformed  so  as  to  entitle  it  to  exercise 
these  broad  powers." 

This  is  quite  a  different  reason  for  the  bill.  The  evil  here 
specified  is  the  impotency  of  government  under  our  political 
system  properly  and  adequately  to  regulate  corporations  ;  and 
the  cure  proposed  is  that  the  New  York  Stock  Exchange  shall 
be  constituted  the  effective  agency  of  corporate  regulation. 
This  means  that  the  National  Government  may  employ  the 
Exchange  to  correct  the  shortcomings  of  the  State  govern- 
ments in  the  regulation  of  corporations  and  the  reform  of 
corporate  abuses  ;  but,  it  is  added,  that  the  Exchange  itself 
must  be  reformed  that  it  may  efficiently  perform  this  function 
of  government.  This  proposition  is  as  startling  as  it  is  novel. 
It  invests  the  Exchange  with  powers  and  functions  that  have 
never  been  within  its  contemplation,  and  the  assertion  of 
which  would  have  subjected   it   to   the   accusation  of   an  un- 


bridled  arrogance.  The  question  naturally  arises,  Low  much 
of  the  bill  is  based  on  the  evils  alleged  to  exist  in  the  trans- 
actions of  the  Exchange,  and  how  much  on  this  programme  of 
corporate  regulation  and  reform.  That  line  will  have  to  be 
drawn  as  we  proceed. 

The  natural  order  of  the  topics  to  be  discussed  is,  in  the 
first  place,  whether  the  alleged  'evils  exist,  and  if  so  to  what 
extent  ;  and  in  the  next  place  whether,  and  to  what  extent, 
the  bill  is  a  practical  remedy  for  any  evils  that  may  be  found 
to  exist.  The  data  to  be  examined  in  determining  these  ques- 
tions are  the  statements  that  have  been  made  and  docu- 
ments submitted  at  the  hearings  held  by  this  Committee  ;  the 
evidence  taken  by  the  House  Committee  that  investigated  the 
so-called  money  trust,  and  the  Pujo  Report  ;  common  knowl- 
edge ;  and  the  bill  itself.  It  is  to  be  borne  in  mind,  so  far 
as  the  testimony  taken  by  the  House  Committee  is  concerned, 
that  the  Committee  was  represented  by  its  own  counsel ;  that 
it  selected  the  witnesses  it  desired  to  hear,  though  in 
some  instances,  so  far  as  the  Stock  Exchange  was  con- 
cerned, after  a  conference  with  its  counsel ;  that  it  selected  the 
topics  respecting  which  it  desired  testimony  ;  that  the  ex- 
amination of  witnesses  was  conducted  solely  by  its  counsel 
and  was  often  in  the  nature  of  a  cross-examination  ;  that 
the  sole  right  of  counsel  for  a  witness  Avas  to  frame  any  ques- 
tion he  might  desire  to  ask  and  submit  it  to  the  Committee 
for  approval  so  that  it  might  be  put  by  the  counsel  for  the 
Committee  if  approved  ;  and  that  many  questions  were  asked 
that  could  not  be  adequately  or  satisfactorily  answered  on  the 
spot  without  opportunity  for  previous  preparation  or  reflection. 
This  is  not  said  by  way  of  criticism,  but  merely  to  call  atten- 
tion to  the  fact  that  the  investigation  was  essentially  ex-parte. 
Moreover  we  feel  bound  to  say  that  the  officials  of 
the  Exchange  felt  throughout  that  there  was  a  deep 
and  controlling  prejudice  against  it,  reflected  in 
the  tenor  of  the  examination  of  many  of  the  witnesses  ;  in  the 


bringing  in  of  topics  calculated  to  create  prejudice  which  were 
not-germane  to  the  inquiry,  and  which  were  afterwards  discarded 
in  the  conclusions  of  the  report  for  that  reason  ;  in  the  treat- 
ment of  such  topics  in  the  report  though  concededly  not  ger- 
mane ;  and  in  the  bias  of  the  report  which  ignores  the  case  of 
the  Exchange  on  almost  every  point.  Had  the  investigation 
been  broadened  out  to  give  the  Exchange  an  opportunity  to  I 
present  its  case  in  its  own  way,  as  it  has  presented  it  to  this  / 
Committee,  which  would  only  have  taken  a  few  days,  though 
the  report  might  not  for  reasons  have  been  different,  the 
record  would  have  been  a  more  complete,  reliable  and  useful 
presentation  of  the  facts. 

The  questions  we  propose  to  discuss  are,  (1)  Is  it  true  that, 
while  a  small  part  of  the  transactions  on  the  Exchange  are  of 
an  investment  character,  and  another  part  represents  whole- 
some speculation,  a  far  greater  part  represents  speculation 
indistinguishable  in  effects  from  the  worst  form  of  gambling  ? 
(2)  Is  it  true  that  there  is  manipulation  of  securities  on  a 
large  scale  without  regard  to  real  value ;  and  that  this 
manipulation  proceeds  not  only  without  hindrance  from  the 
authorities  of  the  Exchange  but  with  their  approval,  provided 
only  that  the  transactions  are  not  fictitious  ?  (3)  Is  it  true 
that  the  facilities  of  the  Exchange  are  largely  employed  for 
transactions  producing  economic  waste  through  withdrawals 
or  diversions  of  capital  from  productive  industry  and  other 
commercial  purposes. 

Having  discussed  these  questions  we  shall  then  be  in  a 
position  to  take  up  the  remedies  of  the  bill  to  determine  to 
what  extent  they  are  necessary,  practical  and  germane. 


I. 

The  nature  of  tlie  transactions  on  the  Ex- 
change. 

(1)  There  are  listed  on  the  Exchange  665  issues  of  stock 
with  a  par  value  of  $13,385,447,500  and  1089  issues  of  bonds 
with  a  par  value  of  $12,589,577,100.  They  are  issues  made 
in  the  main  by  railroad,  industrial  and  mining  cor- 
porations; but  there  are  some  issues  of  municipal 
bonds,  domestic  and  foreign.  The  Exchange  is  the  prin- 
cipal market  in  this  country  for  the  purchase  and  sale 
of  these  securities,  and  in  the  volume  of  its  business 
is  second  only  to  the  London  Exchange.  It  is  also  an  inter- 
national market  of  considerable  magnitude.  The  transactions 
originate  in  orders  to  buy  or  sell  from  all  parts  of  the  country 
and  from  foreign  countries.  Ko  one  can  say  what  proportion 
of  those  transactions  is  of  an  investment  nature,  because  no 
clear  line  can  be  drawn  between  what  is  investment  and  what 
is  speculation.  Many  who  buy  for  investment  buy  partly  on 
credit ;  and  purchase  for  investment  may  have  in  it  a  specu- 
lative element  determining  the  permanence  of  the  investment. 
It  is  a  common  experience  to  buy  for  investment  and  yet  sell 
on  an  unexpected  rise  in  the  market  or  when  an  expected 
rise  takes  place.  It  is  not  a  criterion  of  the  investment  or 
speculative  character  of  a  transaction  whether  or  not  the 
security  is  bought  partly  on  credit  any  more  than  it  is  in  the 
case  of  purchases  of  real  estate.  Securities  bought  with  a 
speculative  purpose  may  be  retained  as  investments.  Any  state- 
ment of  the  proportion  of  the  transactions  that  are  of  an  in- 
vestment as  distinguished  from  a  speculative  character  is 
merely  a  worthless  guess.  There  have  been  numerous  eflforts 
in  the  past  by  foreign  economists  to  establish  that  proportion 


on  foreign  exchanges,  whicli   has  been  discarded  and  the  effort 
abandoned  as  futile. 

(2)  There  is  a  very  large  volume  of  speculative  transactions 
characterized  in  the  Pujo  reports  as  *'  wholesome  "  speculation. 
"  Wholesome  "  speculation  we  take  to  be  speculation  by  per- 
sons who  have  the  means  or -credit  to  carry  their  transactions 
through  and  who  buy  and  sell  intelligently  in  the  expectation 
of  a  rise  in  price  in  the  one  case  or  a  fall  in  the  other.  This  is 
admitted  on  all  sides  to  be  perfectly  legitimate,  and  it  is  just 
as  legitimate  to  sell  in  the  expectation  of  a  fall  in  price  as  to 
buy  in  the  expectation  of  a  rise.  No  one  can  measure  the 
extent  or  proportion  of  the  transactions  on  the  Exchange  of 
this  character;  but  they  are  unquestionably  of  great  magni- 
tude and  a  considerable  proportion  of  the  whole.  What  value 
would  be  attached  by  any  sensible  man  to  any  estimate  of  the 
number  of  men  of  means  and  intelligence  in  this  country  who 
speculate  in  securities  to  some  extent  or  of  the  volume  of 
their  transactions  of  that  character  ? 

(3)  Another  large  class  of  transactions  on  the  Exchange 
consists  of  the  buying  and  selling  of  stocks  by  or  for  the 
dealers  in  lots  less  than  the  Exchange's  unit  of  one  hundred 
shares,  or,  as  they  are  called,  odd  lots.  We  refer  to  the 
statement  of  Mr.  Noble  on  tl^is  point,  where  it  appears  that  he 
is  a  dealer  in  odd  lots ;  that  there  are  many  houses  engaged 
in. the  same  kind  of  business;  that  this  business  in  small  lots 
is  about  twenty  per  cent,  of  each  day's  business  of  the  Ex- 
change in  normal  times ;  and  that  the  bulk  of  it  is  investment 
business  (K.,  pp.  160-178). 

(4)  There  is  a  considerable  body  of  men  on  the  Exchange 
known  as  floor  traders,  who  daily  buy  and  sell  large  volumes 
of  active  stocks  in  the  expectation  of  a  slight  profit  being 
realized  during  the  day.  Another  similar  class,  known  as 
arbitrageurs,  is  composed  of  brokers  here  and  abroad  who 
buy   and   sell   for   a  profit   with   reference   to   differences   in 


8 

prices  on  this  and  foreign  exchanges.  An  arbitra- 
geur buys  or  sells  a  security  listed  on  both 
the  London  and  New  York  Stock  Exchanges  during  the  hours 
that  the  London  Exchange  is  open,  and  buys  or  sells  it  as  the 
case  may  be  during  the  hours  that  the  New  York  Stock  Ex- 
change is  open  on  the  same  day.  The  business  of  the  floor 
trader  is  legitimate  speculation,  and  is  an  important  element 
in  providing  a  continuous  market.  The  arbitrage  business  is 
of  considerable  volume,  and  is  not  only  legitimate,  but  has  a 
distinct  value,  recognized  by  economists,  in  assisting  the 
adjustment  of  international  dealings. 

Mr.  Sturgis  estimated  that  these  dealings  of  floor  traders 
and  arbitrageurs  on  their  own  account  were  one-third  of  the 
total  dealings  on  the  Exchange  (Pujo  Test.,  p.  826). 

(5)  The  only  remaining  element  is  speculation  by  those 
who  should  not  speculate  because  without  either  the  means 
or  the  intelligence  to  do  so,  properly  called  unwholesome 
speculation.  The  volume  of  this  sort  of  speculation  on  the 
Exchange  has  been  constantly  diminishing.  It  is  business 
that  the  broker  avoids  because  of  the  risks  it  involves  in 
rapid  changes  of  price  and  the  doubtful  ability  of  his  cus- 
tomer to  meet  his  obligations.  The  Exchange  prevents  it  to 
the  utmost  limit  of  its  powers.  What  remains  of  it  is 
to  some  extent  due  to  ignorance  of  the  broker  of  the 
real  circumstances  of  his  customer,  either  through  misrepre- 
sentation or  neglect  to  make  proper  inquiries.  There  is  no 
doubt,  however,  that  the  volume  of  the  transactions  of  that 
character  is  enormously  exaggerated  not  only  in  the  popular 
mind  but  by  serious  and  thoughtful  people.  It  is  so  easy  for 
a  defaulter  to  attribute  his  fall  to  speculation  that  all  such 
cases,  as  well  as  the  losses  in  bucket  shops,  and  the  losses 
through  all  the  swindling  schemes  in  connection  with  mining 
and  other  stocks,  not  listed  or  dealt  in  on  the  exchange, 
with  which  the  country  is  flooded,  are  widely  attributed  to 
the  exchanges.     But   the  truth  is  that  the  volume  of   this  un- 


wholesome  speculation  is,  compared  with  the  vast  mass  of 
transactions  that  take  place  on  the  Exchange  every  day, 
too  inconsiderable  to  be  classified  as  a  feature  of  any 
moment  or  influence  on  prices. 

It  is  true  that  the  Hughes  Commission  said  in  its  report 
that  "  it  is  unquestionable  that  only  a  small  part  of  the  trans- 
actions upon  the  Exchange  is  of  an  investment  character  ;  a 
substantial  part  may  be  characterized  as  virtually  gambling  ". 
But  this  statement  is  not  a  conclusion  from  any  verifiable 
data.  Though  it  may  voice  a  popular  impression  it  is  not  in 
accord  with  the  judgment  of  the  men  intimately  connected 
with  the  aflfairs  of  the  Exchange.  Not  only  is  the  volume  of 
the  investment  business  in  their  judgment  much  larger  than  is 
indicated,  but  the  term  gambling  is  not  appropriately  applied 
to  any  substantial  body  of  transactions  on  the  Exchange, 
unless  all  speculation,  whether  in  securities  or  commodities 
or  in  any  other  department  of  human  activity,  is  to  be 
regarded  as  gambling,  which  is  not  an  accepted  use  of  the 
term  either  in  the  domain  of  law,  business  or  economics. 
Wagering  or  gambling  in  connection  with  transactions  in 
securities  is  well  known  to  the  law  and  has  been  defined 
with  precision  ;  and  as  so  defined  it  does  not  include 
what  is  known  in  business  afifairs  or  economics  as  speculation. 
Speculation  is  one  thing  and  gambling  another,  and  no  useful 
purpose  is  served  by  characterizing  one  as  the  other.  When 
important  issues  are  under  discussion  affecting  great  and  vital 
interests  language  should  be  used  with  some  degree  of  pre- 
cision, and  not  figuratively. 

(6)  The  foregoing  is  merely  descriptive  of  the  daily  trans- 
actions on  the  Exchange.  It  is  what  anyone  would  see  if  he 
had  eyes  enough  to  perceive  all  the  transaction  that  take 
place  on  any  day.  He  would  see  purchases  for  investment ; 
he  would  see  sales  on  behalf  of  persons  wishing  to  convert 
their  securities  for  one  purpose  or  another  ;  he  would  see  pur- 
chases and  sales  for  the  dealers  in  odd  lots  to  meet  the  needs 


10 

of  the  small  investor  ;  he  would  see  purchases  and  sales  for 
customers  with  a  purely  speculative  purpose  ;  he  would  see 
the  floor  trader  bujing^aud  selling  for  the  profit  of  the  hour  ; 
he  would  see  the  arbitrageur  selling  securities  that  he  has 
bought  in  London,  or  Paris,  or  Amsterdam,  or  Berlin,  the  same 
day,  or  buying  here  the  securities  he  has  sold  on  a  foreign 
exchange  the  same  day.  Every  transaction  is  recorded 
and  the  quotations  that  go  out  are  the  result  of  all  of  these 
manifold  operations.  They  are  the  product  of  the  judgments, 
temperaments,  hopes,  fears  and  doubts  of  the  vast  multitude 
that  participate  in  them.  It  is  a  scene  of  competition  ;  the 
conservatism  of  investment  face  to  face  with  the  enterprise  of 
speculation  ;  speculation  in  the  expectation  of  a  rise  in  prices 
with  speculation  in  the  expectation  of  a  fall  ;  optimism  with 
pessimism  ;  and  the  resultant  of  this  play  of  forces  is  the 
market  price  of  the  securities  dealt  in  moment  by  moment, 
hour  by  hour.  The  Exchange  is  the  crucible  in  which  all 
these  various  elements  are,  as  it  were,  chemically  combined 
and  concentrated  to  produce  what  we  call  market  values.  All 
these  elements  are  indispensable  as  supplements  and 
correctives  of  each  other.  Eliminate  speculation  and 
the  conservatism  of  investment  would  arrest  the 
development  of  the  country.  Eliminate  speculation  in 
the  expectation  of  a  fall  in  prices  and  the  danger  of  inflation 
of  prices  would  be  constant.  Without  the  free  interplay 
of  all  these  forces  a  market  would  not  perform  its  function  of 
fixing  values  for  the  purposes  of  trade  and  commerce.  To  say 
that  the  swift,  ceaseless  stream  of  transactions  in  such  a  market 
as  the  Exchange  is,  or  can  be,  polluted  in  its  main  body  is  to 
our  minds  absurd.  But  the  fundamental  contention  of  the 
Pujo  Report  is,  that  it  is  so  polluted  by  what  is  called  un- 
wholesome speculation  and  manipulation  ;  hence  this  bill. 
Whether  there  is  any  basis  of  fact  for  that  contention  we 
now  proceed  to  examine,  because  if  there  is  not,  that  might 
well  be  treated  as  the  end  of  the  matter  without  going 
further. 


11 
II. 

.  Un-wliolesoiue    Speculation. 

(1)  An  entire  subdivision  of  the  Pujo  Report  is  devoted  to 
this  subject  (pp.  42-46).  There  is  no  attempt  there  to  define 
the  characteristics  of  unwholesome  speculation  as  contrasted 
with  any  other  kind  of  speculation.  Attention  is  called  to 
certain  tables  and  charts  that  had  been  prepared  for  the  Com- 
mittee, showing  the  dealings  on  the  Exchange  in  the  shares  of 
various  corporations  month  by  month  since  1906,  and  day  by 
day  during  the  most  active  months.  The  corporations  selected 
were  the  United  States  Steel  Corporation,  the  Reading  Com- 
pany, the  Erie  Railroad  Company,  the  Rock  Island  Com- 
pany, the  Consolidated  Gas  Company,  the  Union  Pacific  Rail- 
road Company,  the  Columbia  and  Hocking  Coal  and  Iron 
Company,  the  American  Can  Company,  the  American 
Smelting  and  Refining  Company,  the  Amalgamated 
Copper  Company,  the  Colorado  Fuel  and  Iron 
Company,  the  Brooklyn  Rapid  Transit  Company, 
the  California  Petroleum  Company  and  the  Mexican  Petro- 
leum Company.  This  was  certainly  an  artful  selection  for  the 
purpose.  It  was  a  grouping  of  the  most  speculative  and  active 
stocks  on  the  Exchange  during  the  period  covered  by  the 
tables  and  charts,  not  to  show  normal  or  average  conditions, 
but  for  the  dramatic  efi'ect  of  a  combination  of  extremes.  Had 
tables  been  prepared  to  show  normal  or  average  conditions  it 
would  have  appeared  that  the  total  of  the  dealings  was  just 
about  the  amount  of  the  total  par  value  of  the  listed  securities. 
We  are  not  criticising  the  propriety  of  the  selection  for  the 
purpose  of  showing  extensive  speculation  in  particular  stocks ; 
but  merely  guarding  against  the  inference  that  it  is  a  normal 
condition  with  the  numerous  stocks  actively  dealt  in  on  the 
Exchange.  If,  instead  of  copper  companies,  petroleum  compa- 
nies and  industrial  companies  there  had  been  included  in  the 


12 

list  such  companies  as  Chicago  and  Northwestern,  the  Chicago, 
Milwaukee  and  St.  Paul,  the  Pennsylvania,  the  New  York 
Central,  the  Northern  Pacific,  the  Great  Northern,  the  Louis- 
ville and  Nashville  and  the  American  Telephone  and  Telegraph 
Company,  the  result  would  have  been  a  more  instructive  pre- 
sentation of  actual  conditions. 

It  is  not  necessary  to  state  in  detail  what  these  tables  and 
charts  show.  It  is  enough  to  say  in  a  general  way  that  they 
show  dealings  in  the  course  of  a  month  or  a  year  in  the  stocks 
of  the  companies  selected  of  great  magnitude,  the  total  listed 
stock  of  some  of  the  companies  having  been  sold  many  times 
over  in  the  course  of  a  year,  and  sometimes  more  than  once  in 
the  course  of  a  month.  The  tables  are  condensed  on  page  44  of 
the  Pujo  Beport,  to  which  we  refer  for  the  details. 

(2)  The  important  question  is  what  conclusion  is  to  be 
drawn  from  these  tables  and  charts.  They  show  extensive 
speculation  concentrated  in  certain  popular,  active  and 
speculative  stocks  such  as  is  taking  place  on  every  stock 
exchange  or  bourse  in  the  world.  The  speculator  does  not 
select  slow  moving,  inactive  stocks  in  which  the  dealings 
are  mainly  for  investment.  He  picks  the  stocks  that  are  con- 
spicuous ;  that  are  dealt  in  to  such  an  extent  as  to  have  a  con- 
stant and  wide  market  so  that  he  can  buy  whenever  he  wants 
to  buy  and  sell  whenever  he  wants  to  sell ;  and  which  respond 
quickly  to  all  the  varying  conditions  of  business  and  affairs. 
Such  stocks  are  the  natural  centre  of  speculation.  More- 
over they  are  the  stocks  in  which  the  floor  trader 
and  the  arbitrageur  mainly  deal,  and  the  volume  of 
their  dealings  is  always  heavy  in  active  times.  Mr.  Yan 
Antwerp's  statement  covers  this  situation  quite  fully  (R., 
A  pp.  130,  131).  These  are  the  facts  that  explain  the  great 
volume  of  dealings  shown  by  these  tables  and  charts,  and  which 
will  occur  just  as  long  as  there  are  markets  and  speculation. 
What  the  tables  and  charts  prove  is  speculation  and  nothing 


13 

more.  Thej  do  not  establish  that  the  speculation  was  "  un- 
wholesome ",  whatever  that  may  mean.  There  was  no  evidence 
showing  that  it  was  speculation  by  unintelligent  people  of  in- 
adequate means  and  credit,  or  for  an  illegitimate  or  improper 
purpose.  As  long  as  there  is  speculation  it  will  occur,  in  its 
most  active  and  vigorous  form,  in  connection  with  such  stocks, 
and  therefore  the  tables  and  charts  demonstrate  no  more  than 
that  there  is  constant  and  active  speculation  in  stocks  of  the 
character  selected  involving  a  constant  and  rapid  passing  of 
the  same  shares  or  certificates  from  one  person  to  another. 
The  necessary  consequence  of  speculation  is  that  the  same 
shares  or  certificates  pass  rapidly  from  one  ownership  to  an- 
other in  the  constant  buying  and  selling  that  goes  on,  and 
without  any  transfer  on  the  books  of  the  company.  Hence 
the  fact  that  the  total  dealings  appear  to  be  many  times  the 
total  of  the  capital  stock  of  a  company  in  a  limited  period  of 
time  is  the  inevitable  result  of  speculation  in  and  of  itself,  and 
no  indication  whatsoever  of  an  unwholesome  or  illegitimate 
form  of  speculation. 

(3)  Speculation  is  necessary,  useful  and  legitimate.  We 
need  not  elaborate  this  proposition  in  view  of  the  statements 
made  by  Mr.  Conant,  Professor  Emery,  Mr.  Page  and  Mr. 
Van  Antwerp.  Their  presentation  of  the  matter  was  not 
disputed  by  any  one.  It  is  scientifically  treated  in  the 
writings  of  economists  everywhere,  and  its  legitimacy 
and  vast  usefulness  demonstrated.  John  Stuart  Mill  in 
his  writings  says  that  *'  Speculators  have  a  highly  useful 
office  in  the  economy  of  society;"  and  Leroy — 
Beaulieu,  the  great  French  economist,  says  that  "  the  evils 
which  speculation  prevents  are  much  greater  than  those  it 
causes."  That  many  engage  in  it  who  should  not  do  so  be- 
cause of  lack  of  means  or  intelligence  is  indisputable ;  but 
that  does  not  affect  the  fact  that  it  is  a  legitimate  process. 
As  long   as   human  nature  remains  as  it  is  the  unfit  will   en- 


14 

gage   in   speculation   to    their  detriment  no  matter   what  pre- 
cautions are  taken.     As  we  have  said  in  another  place  : 

"  The  matter  may  be  put  in  this  way.  The  right  to 
buy  and  sell  securities  is  just  as  much  an  inherent  right 
as  the  right  to  buy  and  sell  any  other  commodity.  This 
right  can  be  exercised  unwisely  and  recklessly;  but 
there  is  no  way  of  providing  by  law  or  rule  that  a  right 
may  be  exercised  wisely  but  may  not  be  exercised  un- 
wisely. The  possession  of  the  right  carries  with  it  the 
possibility  of  its  unwise  exercise." 

So  far  as  the  effect  of  illegitimate,  as  distinguished  from 
unwholesome,  speculation  upon  prices  is  concerned,  if  they  are 
separable  things,  which  there  is  nothing  in  the  Pujo  report  to 
indicate,  the  remark  of  President  Hadley  in  his  work  on  Econ- 
omics that  "  the  illegitimate  speculations  deal  with  the  same 
articles  as  the  legitimate  ones  "  has  an  important  bearing,  be- 
cause it  shows  that  whatever  there  may  be  in  the  way  of  ille- 
gitimate speculation  however  defined  with  respect  to  a  stock 
or  security  or  any  other  article  is  being  corrected  all  the  time 
by  the  legitimate  speculation  in  the  same  stock,  security  or 
article.  To  conclude  what  we  have  to  say  on  this  sub- 
ject we  again  insist  that  the  tables  and  charts  under  discus- 
sion simply  show  speculation,  and  contribute  no  evidence 
whatsoever  to  support  the  assertion  that  it  was  unwholesome 
or  illegitimate  speculation. 


III. 

Manipulation. 

(1)  The  term  manipulation  is  one  of  comparatively  recent 
origin.  Like  all  such  terms  it  is  necessary  to  define  it  to 
avoid  confusion  in  its  discussion.  We  get  nowhere  if  it  has 
different  meanings  to  different  minds.    It  has  been  so  much 


15 

used  of  late  that  it  should  haye  a  definite  meaning  and  appli- 
cation ;  but  that  is  far  from  the  truth.  It  has,  for  instance, 
been  applied  argumentatively  before  this  Committee  to  trans- 
actions to  which  it  does  not  at  all  apply.  It  is  also 
improperly  confused  with  speculation.  It  is  not  easy  to 
say  what  the  meaning  commonly  attributed  to  it  is,  be- 
cause it  is  generally  used  as  a  term  of  vituperation 
rather  than  as  description  of  a  definite  class  of  transac- 
tions. Perhaps  as  accurate  a  definition  as  can  be  given  of  it 
is,  the  giving  by  the  same  man  or  group  of  men  of  contem- 
poraneous, or  practically  contemporaneous,  orders  to  various 
brokers  to  buy,  and  to  other  brokers  to  sell  the  same  security 
at  the  market  price  whatever  it  may  be,  from  time  to  time,  for 
the  purpose  of  realizing  a  speculative  profit,  in  some  cases 
from  an  expected  or  intended  rise  in  the  price  and  in  other 
cases  from  an  expected  or  intended  fall  in  the  price,  the  vice 
of  such  a  system  of  orders  being  that  their  execution  may  not 
involve  a  change  of  ownership. 

Let  us  now  analyze  various  classes  of  transactions  to  de- 
termine whether  or  not  they  are  manipulation  within  this 
definition. 

(a)  Contemporaneous  orders  may  be  given  to  different 
brokers,  emanating  from  the  same  man  or  group  of  men,  for  the 
sale  of  a  stock  at  a  fixed  price  and  on  a  scale  up,  and  for  the 
purchase  of  the  same  stock  at  a  lowar  fixed  price  and  on  a  scale 
down.  It  is  clear  that  the  brokers  with  such  orders  to  sell  on 
the  one  hand  and  to  buy  on  the  other  can  never  treat  or  deal 
with  each  other  under  these  orders,  because  under  these  cir- 
cumstances the  sales  by  the  brokers  having  the  orders  to  sell 
must  be  to  outsiders  and  the  sales  to  the  men  with  orders  to 
buy  must  be  made  by  outsiders.  There  may  be  various  ob- 
jects or  purposes  for  such  a  system  of  orders ;  for  instance 
to  steady  the  market  in  times  of  excitement  when  the 
bankers  behind  an  issue  of  stock  feel  a  responsi- 
bility    with     respect     to     its      going      unwarrantably     high 


16 

or  unwarrantably  low  to  the  injury  of  investors  ;  or  to  steady 
the  market  price  of  a  new  issue ;  or  to  furnish  a  market  to 
anyone  who  has  acquired  the  stock  and  desires  to  sell  or  to 
any  one  who  desires  to  buy.  It  is  for  those  purposes  a  per- 
fectly legitimate  operation  and  not  manipulation  in  any  sense. 
This  is  clearly  shown  by  the  testimony  of  Mr.  Henry  in 
the  case  of  the  California  Petroleum  Company,  who,  notwith- 
standing strenuous  efiforts  of  counsel  to  show  that  such  a  pro- 
ceeding was  manipulation,  conclusively  established  that  it 
was  not.  (Pujo  E.,  pp.  1282-1287).  Transactions  of  this 
character  are  not  therefore  manipulation. 

{h)  Another  class  of  transactions  consisted  of  contempora- 
neous orders  given  by  the  same  man  or  group  of  men  to 
various  brokers  to  buy  a  stock  "at  the  market",  and  to 
another  set  of  brokers  to  sell  "  at  the  market."  The  two 
sets  of  brokers  being  on  the  floor  at  the  same  time  the 
result  might  be  that  they  would  trade  with  each  other,  and  if 
they  did  no  real  change  of  ownership  occurred,  though  the 
transactions  between  the|brokers  were  actual  transactions,  and 
the  brokers  themselves  were  ignorant  that  the  same  principals 
were  behind  all  of  iihem.  By  the  transactions  being  actual  in 
such  cases  we  mean  that  in  every  case  there  was  a  purchase 
and  sale  consummated,  as  distinguished  from  a  mere  matching 
of  orders  or  "  washing  "  of  transactions. 

A  resort  to  such  transactions  in  good  faith  to  draw  atten- 
tion  to  a  new  stock  on  the  basis  of  its  real  value  was  approved 
by  the  Hughes  Commission,  which  said,  with  reference  to  it, 
that  this 

"kind  of  manipulation  has  certain  advantages,  and 
when  not  accompanied  by  *  matched  orders' is  unob- 
jectionable per  se.  It  is  essential  to  the  organization 
and  carrying  through  of  important  enterprises,  such  as 
large  corporations,  that  the  organizers  should  be  able 
to  raise  the  money  necessary  to  complete  them.  This 
can  be  done  only  by  the  sale  of  securities.  Large  blocks 
of  securities,  such  as  are  frequently  issued  by  railroad 
and  other  companies,  cannot  be  sold  over  the  counter 


17 

or  directly  to  tlie  ultimate  investor,  whose  confidetice 
in  them  can,  as  a  rule,  be  only  gradually  established. 
They  must,  therefore,  if  sold  at  all,  be  disposed  of  to 
some  syndicate,  who  will  in  turn  pass  them  on  to  middle- 
men or  speculators,  until,  in  the  course  of  time,  they 
find  their  way  into  the  boxes  of  investors.  But  prudent 
investors  are  not  likely  to  be  induced  to  buy  securities 
which  are  not  regularly  quoted  on  some  exchange,  and 
which  they  cannot  sell,  or  on  which  they  cannot  borrow 
money  at  their  pleasure.  If  the  securities  are  really 
good  and  bids  and  offers  bona  fide,  open  to  all  sellers 
and  buyers,  the  operation  is  harmless.  It  is  merely  a 
method  of  bringing  new  investments  into  public  notice." 

Whether  this  is  a  sound  view  or  not,  it  was  at  any  rate  the 
view  generally  accepted  as  sound  and  correct  not  only  on  the 
Exchange,  but  outside  of  it ;  and,  indeed,  it  is  only  recently 
that  it  has  been  questioned.  But  as  such  transactions  might 
be  resorted  to  for  purely  speculative  purposes,  they  have  pre- 
sented a  difficult  problem.  The  attitude  of  the  Exchange 
formerly  was,  that  if  the  transactions  were  actual,  in  every 
case  being  consummated  by  payment  and  delivery,  and  free 
from  collusion,  they  were  legitimate.  This  is  the 
purport  of  the  testimony  of  Mr.  Sturgis  before  the 
Pujo  Committee,  which  is  so  severely  criticised  in  its  re- 
port (pp.  46-47).  Mr.  Sturgis  was  simply  defining 
what  the  attitude  of  the  Exchange  had  been.  The 
suggestion  that  he  laid  stress  in  his  testimony  on  the 
payment  of  the  commission  of  the  brokers,  as  if  that  were  the 
sole  interest  of  the  Exchange,  is  quite  unwarranted  because  it 
is  clear  that  he  only  mentioned  the  payment  of  the  commission 
because  it  was  evidence  bearing  on  the  actuality  of  the  trans- 
actions. In  recent  times  there  has  arisen  a  conflict  of  opinion 
on  this  subject,  and  the  Governors  of  the  Exchange  have  taken 
advanced  ground  by  prohibiting  such  transactions  altogether. 
The  resolution  of  February  5th,  1913,  hereinafter  set  forth,  is 
explicit  on  this  point  in  prohibiting  all  transactions  that  do 
not  involve  a  change  of  ownership. 

But  there  remains  the  question,  what  substantial  evidence 


18 

is  there  that  there  was  ever,  any  considerable  body  of  transac- 
tions on  the  Exchange  of  that  character.  We  may  be  sure  that 
if  there  was  any  such  body  of  transactions  they  would  have 
been  elaborately  and  exhaustively  exploited  by  counsel  before 
the  Pujo  Committee.  With  his  large  practice,  extending  back 
many  years,  and  the  knowledge  that  it  must  have  given  him  of 
what  was  taking  place  in  the  world  of  enterprise,  business  and 
finance,  and  his  wide  acquaintance  with  men  prominent  and 
active  in  affairs,  it  is  reasonable  to  assume  that  no  past  oper- 
ations in  securities  on  a  large  scale  calculated  to  attract  atten- 
tion by  their  character  and  results  escaped  his  knowledge  or 
were  not  ascertainable  by  him.  It  is  fair  to  say  that  the 
instances  he  did  bring  forward  are  all  that  he  could  produce, 
with  all  the  sources  of  information  at  his  command,  with 
any  show  of  establishing  his  case  against  the  Exchange. 
Had  the  Exchange  been  the  scene  for  years  and  years  of  pred- 
atory movements  in  stocks  on  a  large  or  small  scale,  the 
record  of  the  Money  Trust  investigation  would  show  the  fact 
conclusively  ;  and  it  is  no  escape  from  the  meagerness  of  the 
record  in  this  regard  to  say  that  the  instances  given  were 
"  typical."  It  is  too  favorite  a  device  of  the  advocate  seeking 
to  establish  a  general  condition  to  insist  that  the  particular 
instances  he  produces  are  "  typical  "  to  accept  such  a  state- 
ment as  a  substitute  for  actual  evidence.  These  particular 
instances  must  therefore  be  treated  as  the  only  transactions 
that  could  be  produced  with  sufficient  definiteness  to  consti- 
tute proof  or  evidence. 

(2)  These  instances  are  the  Columbus  and  Hocking  Coal 
and  Iron  pools,  the  Rock  Island  "  episode  "  of  December  27, 
1909,  and  the  California  Petroleum  Company  matter,  which 
are  discussed  on  pages  47-52  of  the  Pujo  Report.  We  will 
take  them  up  in  their  order  : 

faj  The  Columbus  and  Hockmg  Goal  and  Iron  Company 
Pooh. 


19 

Tlie  Columbus  and  Hocking  Coal  and  Iron  Company  owned 
property  consisting  of  over  13,000  acres  of  land  in  Athens, 
Hocking,  Perry  and  Vinton  Counties,  Ohio  ;  250  acres  of 
mineral  leaseholds  ;  4  blast  furnaces  with  a  capacity  of  70,000 
tens  annually ;  14  active  coal  mines  with  an  annual  capacity 
of  2,000,000  tons  ;  and  various  town  lots,  stores  and  dwelling 
houses.  It  had  also  valuable  clay  deposits  on  its  lands  and 
did  a  thriving  business  in  bricks  and  paving  blocks.  Not  long 
prior  to  March,  1909,  oil  in  paying  quantities  had  been  dis- 
covered on  the  property  (Poor's  Manual,  1909).  There  were 
about  70,000  shares  of  its  common  stock  listed  on  the  Ex- 
change (Pnjo  Test.,  p.  701).  The  company  had  a  bonded  debt 
of  $1,260,000,  $500,000  preferred  stock  and  $7,000,000  com- 
mon stock.  In  March,  1909,  a  so-called  pool  was  formed  to 
acquire  20,000  shares  of  the  stock.  Later  another  pool  was 
formed  to  buy  20,000  additional  shares.  Lathrop,  Haskins  & 
Co.  and  James  K.  Keene  were  the  principal  holders  in  both 
pools,  and  associated  with  them  were  various  banking  and 
brokerage  houses. 

A  pool  in  and  of  itself  is  simply  a  joint  venture  of  vari- 
ous individuals,  managed  by  some  individual  or  firm  se- 
lected for  that  purpose.  It  has  always  been  asserted  by  the 
members  of  these  pools  that  they  were  formed  in  the  belief 
that  the  enterprise  was  bound  to  be  successful  in  a  degree  that 
would  make  its  stock  very  valuable.  At  the  time  the  first 
pool  was  formed  the  stock  was  inactive  and  selling  at  about 
20.  Through  the  transactions  on  behalf  of  these  pools  in  the 
acquisition  of  the  stock  it  rose  in  price  until  in  the  first  week 
of  May,  1909,  it  was  selling  at  65J.  It  rose  to  90  by  November 
13th,  1909,  and  remained  in  that  vicinity  until  the  third  week 
of  January,  1910.  On  January  19th,  1910,  through  a  large 
amount  of  stock  being  unexpectedly  thrown  on  the  market,  and 
the  inability  of  the  active  men  in  the  pools  to  provide  suffici- 
ent capital  to  sustain  the  market,  the  stock  collapsed  ;  the  price 
fell  rapidly  from  88  to  25  ;  and  three  of  the  participating  firms 
failed. 


4 


20 

The  transactions  of  tlie  pools  in  acquiring  their  holdings 
consisted  of  buying  and  selling  orders  at  prices  fixed  by  their 
manager  and  the  brokerage  house  in  direct  charge  of  the  mat- 
ter for  him,  given  to  a  large  number  of  brokers,  among  wbom 
there  was  no  collusion,  each  transaction  being  actually  carried 
out.  These  transactions  were  resorted  to  because  the  pools 
being  the  buyers  in  the  market  their  purchases  would  have 
rapidly  carried  the  stock  to  an  inordinate  price  unless  there 
had  been  also  selling  orders.  The  testimony  of  Mr.  Popper 
shows  that  these  buying  and  selling  orders  were  given  at 
specific  and  limited  prices  (Pujo  Test.,  p.  906).  In  the  case  of 
Mr.  Criss,  who  is  what  is  called  a  specialist  and  as  such  was 
the  only  broker  who  had  both  orders  to  buy  and  sell,  it  appears 
that  his  orders  were  to  sell  on  a  scale  up  and  to  buy  on  a 
scale  down  (Idem^  911).     That  is,  in  outline,  the  transaction. 

The  report  of  the  Pujo  Committee  is  very  severe  in  its 
animadversions  on  the  Exchange  respecting  this  matter.  On 
page  49  it  said  : 

"  That  the  authorities  of  the  exchange  were  aware  of 
this  operation  while  it  was  in  progress  is  shown  by  the 
fact  that  the  firm  most  prominently  engaged  in  it  on  the 
floor  of  the  exchange  was  *  twice  cautioned  '  by  the 
president  at  the  request  of  the  law  committee  (Sturgis, 
K.,  845).  Having  this  knowledge  it  would  have  been 
an  easy  matter  for  the  law  committee  and  the  govern- 
ing committee  under  their  power  to  inquire  into  the 
dealings  of  members  and  to  make  examinations  of  their 
books  (Const.,  Art.  XI.,  subd.  9;  Art.  XVII.,  sec.  7),  to 
.  discover  all  those  engaged  in  the  operation  and  stop 
it.  The  accountant  for  the  receiver  in  bankruptcy  of 
one  of  the  failed  firms,  with  more  limited  facilities  for 
examination,  was  able  to  uncover  the  *  wash  sales  '  and 
other  manipulative  transactions  and  the  brokers  who 
executed  them  (Morse,  R.,  714-716).  More  remarkable 
even  than  the  neglect  of  the  authorities  of  the  exchange 
to  stop  this  operation  when  they  knew  it  was  going  on 
was  the  theory  on  which  they  inflicted  punishment  after 
the  pool  collapsed.  Of  the  9  or  10  firms  engaged  in 
the  pool,  only  the  ones  that  failed  were  punished.  They 
were  expelled  from  the  exchange.  The  others  were 
neither  expelled  nor  suspended,  but  merely  '  censured.' 


21 

Thus  the  punishment  was  inflicted,  not  for  the  character 
of  the  operations,  since  all  were  equally  culpable  in 
that  regard,  but  for  becoming  insolvent  in  consequence 
of  dealing  beyond  one's  means." 

Mr.  Sturgis  did  say  in  his  testimony  that  the  firm  most 
prominently  engaged,  which  was  the  firm  of  Lathrop,  Haskins 
&  Company,  had  been  twice  cautioned  by  the  president  of  the 
Stock  Exchange,  Mr.  E.  H.  Thomas.  Had  Mr.  Thomas  been 
called  as  a  witness,  it  would  have  appeared  that  as  early  as 
May  10th,  1909,  he,  together  with  Mr.  Ely,  the  Secretary  of  the 
Exchange,  had  inquired  into  the  matter  ;  and  that  they  had 
Mr.  Haskins  before  them,  who  expressed  a  firm  belief  in  the 
future  of  the  Company,  and  informed  them  that  they  had  been 
large  holders  of  the  stock  for  some  years  ;  that  all  stories  of  a 
"  corner  "  or  of  a  large  short  interest  wore  absolutely  untrue  ; 
that  there  was  no  large  buying  demand  ;  that  part  of  the  hold- 
ings of  13,000  acres  of  the  Company  had  been  leased  to  an  oil 
operating  company  whose  wells  were  all  producing,  some  as 
high  as  250  barrels  a  day  ;  that  developments  in  the  adjoining 
lands  made  it  appear  certain  that  the  Company's  lands  would 
produce  large  quantities  of  high  grade  crude  petroleum  oil  ; 
that  they  were  amply  able  by  well-secured  time  loans  to  care 
for  the  situation,  especially  in  case  any  of  the  stockholders  were 
anxious  to  sell,  giving  the  name  of  their  bankers  to  verify  that 
fact ;  that  the  market  was  perfectly  legitimate  ;  and  that 
he  and  his  associates  were  going  to  hold  their  stock  because 
of  what  they  believed  to  be  its  real  value.  It  is  moreover  the 
fact  that  in  October,  1909,  the  property  was  visited  by  a  party 
of  engineers  and  bankers  who  were  most  favorably  impressed 
with  it,  and  whose  opinion  became  known  to  members  of  the 
Law  Committee  of  the  Exchange. 

The  volume  of  transactions  in  the  stock  on  the  Exchange 
for  six  months  prior  to  January  19th,  1910,  had  been  light, 
averaging  about  800  shares  per  day.  The  rise  in  price  from 
20  to  65  between  March,  1909,  and  the  first  week  in  August, 


1909,  and  the  subsequent  rise  from  Q^  at  that  time  to  90  in 
November,  was  due  to  the  purchases  on  behalf  of  the  pools. 
During  this  time  it  was  the  outsiders  who  sold  their  stock  to 
the  pools  (Horace  White,  E.,  p.  291  ;  Sturgis,  Pujo  Test.,  p. 
848). 

The  statement  in  the  Pujo  report  that  the  accountant  for 
the  receiver  in  bankruptcy  was  able  to  uncover  the  *'  wash 
sales  and  other  manipulative  transactions  "  is  entirely  un- 
founded. The  accountant  referred  to  was  Mr.  Morse.  What 
Mr.  Morse  said  is  shown  by  the  following  quotation  from  his 
testimony  : 

"  Mr.  Untermyer  :  Will  you  look  at  your  state- 
ments there  and  see  whether  you  found  any  wash  trans- 
actions ? 

Mr.  Morse  :  It  is  impossible  to  pick  those  out,  Mr. 
Untermyer,  from  these  statements.  As  I  stated  before, 
this  work  jvas  done  with  the  end  in  view  of  finding  out 
who  was  selling  the  stock  short,  and  not  with  the  end 
in  view  of  finding  out  what  is  known  as  wash  transac- 
tions."    (Morse,  E.,  713). 

It  was  a  pure  assumption  on  the  part  of  the  counsel 
of  the  Committee  that  there  were  "  wash  transactions  ",  as  is 
evident  from  the  testimony  on  pages  713  and  714.  Mr.  Morse 
is  an  accountant  by  profession,  not  an  expert  in  stock  ex- 
change transactions  ;  he  had  no  personal  knowledge  of  the 
transactions  ;  and  all  that  he  could  state  was  that  the  books 
he  had  examined  showed  that  there  had  been  buying  and 
selling  orders  executed,  and  the  volume  of  them.  Yet  he  is 
cited  in  the  report  as  the  authority  for  the  existence  of 
manipulation.  What  actually  took  place  is  shown  in  the 
following  testimony  of  Mr.  Popper,  whose  firm  gave  out  most 
of  the  orders,  to  which  there  is  no  allusion  in  the  report 
(.Idem.,  906)  : 

"  Mr.  Untermyer  :  Among  how  many  brokers  did 
you  scatter  these  buying  and  selling  orders  ?  Mr. 
Popper  :  Twenty-five  ;  that  is,  25  different  brokers.  Mr. 
Uktermyer  :     Did    the   buying   brokers  know  who  re- 


23 

ceived  the  selling  orders  ?  Mr.  Popper  :  No,  sir.  Mr. 
Untermyer  :  Nor  the  selling  brokers  know  who  re- 
ceived the  buying  orders?  Mr.  Popper:  No,  sir.  Mr. 
Untermyer  :  Were  your  orders  to  buy  and  sell  on  a 
scale  or  at  the  market  ?  Mr.  Popper  :  No,  sir ;  as  a 
rule,  the  order  came  to  buy,  as  the  orders  were  executed, 
at  a  limited  price,  generally  speaking.  Mr.  Untermyer  : 
Was  it  on  a  scale  ?  Mr.  Popper  :  No,  sir.  Mr.  Unter- 
myer :  The  selling  orders  were  not  on  a  scale  ?  Mr. 
Popper  :  No,  sir.  Mr.  Untermyer  :  Then  the  price 
was  named  ?  Mr.  Popper  :  The  price  was  always 
named." 

Mr.   Popper  did  not   even   know   that  there   was  a   pool 
{Idem,  908).     Mr.  Criss  testified  as  follows  {Idem,  911)  : 

**  Mr.  Untermyer  :  What  were  your  orders  as  to 
buying  and  selling  everyday?  Mr.  Criss  :  The  19th 
of  "January,  which  is  typical,  I  had  orders  to  buy  200  at 
87J  and  200  each  quarter  down.  Mr.  Untermyer: 
How  about  selling  ?  Mr.  Criss  :  To  sell  at  90  and 
every  quarter  up,  200.  Mr.  Untermyer  :  Let  me  see 
if  I  understand.  This  is  a  typical  case  of  each  day's 
proceedings  that  you  would  get  an  order  in  the  morn- 
ing to  buy  how  many  shares  ?  Mr.  Criss  :  Two  hun- 
dred ;  beginning  at  any  figure,  to  buy  200 ;  and  then 
each  quarter  down,  200.  Mr.  Untermyer:  And  then 
to  sell  ?  Mr.  Criss  :  Oh,  say  a  couple  of  points  higher, 
200  ;  and  every  quarter  up,  200.  Mr.  Untermyer  :  I 
think  you  said  these  orders  all  came  from  Haskins  ? 
Mr.  Criss  :  Practically  all  came  from  Haskins." 

So  far  as  the  disciplinary  action  of  the  Exchange  is  con- 
cerned, which  is  commented  upon  so  adversely,  the  fact  is 
that  it  was  perfectly  proper  for  a  number  of  men  to  asso- 
ciate themselves  together  to  purchase  a  large  block  of  stock  ; 
that  in  doing  so  they  at  that  time,  violated  no  rule  of 
the  Exchange  in  giving  out  orders  to  one  set  of  brokers  to 
sell  at  a  fixed  price  and  to  another  set  of  brokers  to  buy  at  a 
fixed  price,  there  being  no  collusion  or  possibility  of  collusion 
between  the  brokers,  no  broker  having  a  knowledge  of  any 
order  given  to  another  broker,  the  orders  all  being  exe- 
cuted in  the  open  market,  and  the  transactions  all  actually 
carried  out  and  completed ;  nor  was  it  a  violation  of    any  rule 


24 

of  the  Exchange  to  give  selling  orders  on  a  scale  up  and  buy- 
ing orders  on  a  scale  down.  There  was  no  basis,  therefore, 
for  the  punishment  of  anybody  in  connection  with  those 
transactions  as  they  were  carried  on.  But  these  men  had 
engaged  in  a  transaction  involving  the  acquisition  of  a 
large  amount  of  stock  which  would  necessarily  raise  its  price, 
and  they  could  only  properly  engage  in  such  a  transaction 
if  they  had  suflScient  and  adequate  means  to  sustain  the 
market  as  stock  was  offered  for  sale,  and  thereby  prevent  a 
disastrous  drop  in  price.  It  was  a  separate  question  as  to 
each  individual  concerned  as  to  whether  he  had  the  means 
to  meet,  and  had  met,  all  of  his  obligations  connected  with 
his  participation  in  the  enterprise.  That  was  true  in  some 
cases  and  it  was  not  true  in  others ;  and  those  who  had  not 
the  means  were  punished  by  expulsion  because  they  were 
guilty  of  reckless  dealing  in  trading  beyond  their  means. 
Others  who  had  the  means  and  met  their  obligations  at  con- 
siderable loss  to  themselves,  were  censured  because  of  certain 
circumstances  of  relatively  minor  importance  connected  with 
their  participation  in  the  pools  (Sturgis,  K.,  845-857).  We 
submit  that  this  statement  of  the  actual  fact  shows  that  the 
attack  on  the  authorities  of  the  Exchange  with  regard  to  this 
transaction  is  entirely  unwarranted. 

(h)  The  Rock  Island  "  episode  "  of  December  27,  1909, 
How  this  can  be  called  an  instance  of  manipulation  is  quite 
beyond  our  comprehension.  It  appears  that  a  firm  of  brokers, 
by  direction  of  a  man  of  large  means  and  prominent  in  the 
financial  world,  gave  orders  to  twenty  brokers,  each  to  buy  at 
the  opening  of  the  market  two  thousand  shares  of  the  common 
stock  of  the  Eock  Island  Company  "  at  the  market ".  The  pur- 
chases were  made  and  the  price  of  the  stock  rose  thirty  points. 
When  they  stopped  the  stock  naturally  fell  to  its  normal  price. 
That  is  all  there  was  to  the  transaction.  The  result  of  it  was 
that  the  parties  who  sold  realized  $640,000  more  than  their 
stock  was  worth  at  that  time,  and  the  man  who  bought  simply 


25 

lost  tliat  amount.  It  was  to  all  appearances  a  senseless  trans- 
action, but  one  absolutely  free  from  manipulation  (Horace 
White,  K.,  p.  291).  Until  the  Pujo  report  appeared  there  had 
never  been  a  suggestion  by  anybody  that  the  transaction  involved) 
manipulation,  whatever  the  explanation  of  it  may  have  been ;  and 
its  finding  that  it  was  manipulation  is  one  unsupported  by  any 
testimony  and  entirely  baseless.  The  firm  of  brokers  was  not 
disciplined  on  any  charge  of  manipulation.  The  finding  of  the 
Board  of  Governors  against  them  was,  that  it  was  an  act 
of  bad  judgment  to  give  out  such  a  mass  of  orders  to 
twenty  different  brokers,  who  would  all  go  into  the  market 
to  buy  at  the  same  time,  as  they  should  have  known  that  it 
would  create  a  state  of  temporary  confusion,  excitement  and 
demoralization.  Taking  into  account  the  high  standing  of 
the  firm  the  penalty  imposed  was  a  very  severe  one  for  an  act 
that  at  the  outside  could  only  be  condemned  as  careless  or 
inadvertent. 

(c)    The  California  Petroleum  Company  matter. 

There  has  been  so  much  said  on  this  subject  that  we  shall 
confine  ourselves  to  a  correction  of  erroneous  impressions 
concerning  it  conveyed  by  the  Pujo  report  and  by  what  was 
said  about  it  to  this  Committee.  With  the  transactions  prior 
to  the  listing  of  the  stock  the  Exchange  had  nothing  what- 
soever to  do.  The  purchase  of  the  stock  by  a  group  of 
bankers,  the  taking  over  of  a  portion  of  it  by  a  syndicate, 
and  the  sale  of  what  was  so  taken  on  behalf  of  the  mem- 
bers of  the  Syndicate,  were  all  matters  prior  to  the  listing 
and  with  which  the  Exchange  had  no  connection.  The  stock 
was  not  listed  to  make  a  market  for  it  whereby  it  could 
be  sold  on  behalf  of  the  syndicate  to  the  public  ;  nor,  as 
is  stated  in  the  Pujo  report ;  (p.  52),  *''  to  create  an  appearance 
of  activity  in  the  stock  that  would  enable  those  to  whom  it  had 
been  sold  to  resell  it  to  the  general  public  at  a  profit."  The 
comment  in  the  report  that  "  no  action  appears  to  have  been 
taken  by  the  Exchange  as  the  result  of  this  operation,  in  which 


26 

important  banking  houses,  members  of  the  Exchange,  were 
involved,"  is  a  reflection  both  on  the  Exchange  and  the  banking 
houses. 

The  fact  is  that  the  stock  which  was  taken  by  the  syndicate 
of  a  hundred  or  more  members  formed  by  Salomon  &  Co., 
Hallgarten  &  Co.  and  Lewisohn  Brothers,  composing  the  group 
of  bankers  who  had  originally  acquired  the  stock,  was  all  sold 
before  the  stock  was  listed  on  the  Exchange.  Mr.  Henry  tes- 
tified that  "  every  share  of  the  stock  had  been  sold  before  the 
stock  was  listed  "  (Pujo  Test.,  p.  1282).  Mr.  Lewisohn  testi- 
fied (Idem,  p.  923) :  "  Mr.  Untermyer  :  Did  you  or  not 
operate  for  that  syndicate  after  selling  it?  Mr.  Lewisohn: 
No  sir.  We  sold  the  preferred  and  common 
and  cleaned  up  the  syndicate  before  it  went  on  the  Stock  Ex- 
change. Mr.  Untermyer  :  Then  you  transferred  it  to  another 
syndicate  ?  Mr.  Lewisohn  :  No,  we  did  not  transfer  it.  We 
sold  it  to  individual  investors."  The  stock  was  dealt  in  on 
the  Curb  before  it  was  listed  on  the  Exchange,  and  the  first 
price  at  which  it  sold  on  the  Curb  was  about  50  (id.j  p.  946). 

The  stock  was  listed  on  the  5th  day  of  October,  1912,  on 
an  elaborate  application  that  justified  its  listing.  The  appli- 
cation has  been  filed  with  this  Committee.  There  w^as  great 
eagerness  to  buy  the  stock,  amounting  to  a  state  of  excite- 
ment (id.j  p.  925).  Thereupon  the  transactions  took  place 
which  are  criticized.  The  group  of  bankers  who  had  brought 
the  stock  out  deemed  it  wise  and  proper,  under  the  circum- 
stances, to  steady  the  market.  Though  they  had  disposed  of 
all  their  holdings  they  felt  a  responsibility  in  connection  with 
the  stock  because  they  had  brought  it  out,  which  is  the 
usual  attitude  of  bankers  who  bring  out  issues  of  stock 
or  bonds.  The  stock  opened  on  the  Exchange  at 
66.  What  the  bankers  did  was  to  give  to  difi'erent 
brokers  selling  orders  on  a  scale  up  and  buying  orders  on  a 
scale  down.  The  Pujo  report  (p.  51)  says  that  this  was  done 
"  for  the  purpose,  as  described,  of  *  making  a  market,'  "  citing 


27 

Henry,  K.,  1282,  1283.  What  Mr.  Henry  meant  by  this  ex- 
pression is  shown  by  the  next  question  and  answer,  which  are  : 
*'  Me.  Untermyer  :  Do  you  moan  that  it  was  done  in  order  to 
make  an  apparent  activity  in  it  ?  Mr.  Henry  :  Not  in  order 
to  make  an  apparent  activity  in  it,  but  to  have  somebody  there 
always  to  buy  if  anybody  wanted  to  sell  it  and  somebody 
there  always  to  sell  if  anybody  wanted  to  buy  it "  {Id.,  p. 
1282).  The  real  object  of  these  transactions  is  made  clear  by 
the  extract  from  Mr.  Henry's  testimony  which  follows  (pp. 
1282,  1283)  : 

"  Mr.  Untermyer  .  Do  you  not  know,  Mr.  Henry, 
that  the  market  operator,  Lewisohn  Brothers,  were 
doing  the  buying  and  selling  themselves  every  day  ? 
Mr.  Henry  :  Surely.  Mr.  Untermyer  :  In  other 
words,  they  were  putting  in  orders  to  buy  and  orders 
to  sell  ?  Mr.  Henry  :  Certainly.  Mr.  Untermyer  : 
Every  morning?  Mr.  Henry:  Certainl^^  Mr.  Un- 
termyer :  And  you  were  a  party  to  that  ?  Mr.  Henry  : 
They  were  acting  under  our  general  direction.  Mr. 
Untermyer  :  Every  morning  they  would  give  orders  to 
certain  brokers  to  buy  and  orders  to  certain  brokers  to 
sell  ?  Mr.  Henry  :  They  would  put  in  selling  orders 
on  a  scale  up  and  buying  orders  on  a  scale  down.  Mr. 
Untermyer  :  Yes.  Mr.  Henry  :  That  is  done  to  steady 
the  price  of  the  stock.  Mr.  Untermyer  :  You  think  so  ? 
It  is  done  to  tnake  an  appearance  of  activity  in  the 
stock,  is  it  not  ?  Mr.  Henry  :  No  sir ;  it  is  done  to 
steady  the  price  of  the  stock.  Mr.  Untermyer  :  Why 
should  you,  for  instance,  give  orders  to  half  a  dozen 
brokers  or  more  to  buy  a  given  amount  of  stock  and 
orders  at  the  same  time  to  sell  stock,  with  the 
idea  that  you  would  not  at  the  end  of  the 
day  have  any  stock  either  bought  or  sold  ? 
Mr.  Henry  :  Will  you  let  me  answer  that  in  my  own 
way  ?  Mr.  Untermyer  :  Yes.  Mr.  Henry  :  When  a 
new  stock  is  put  on  the  exchange,  on  any  great  ex- 
change like  the  New  York  Stock  Exchange,  there  is  one 
thing  that  is  very  necessary,  and  that  is  that  its  price 
shall  be  steady.  When  you  have  no  active  market  in  a 
stock,  when  you  are  building  up  an  active  market  in  a 
new  stock,  the  first  thing  a  banking  house  does,  what  it 
wants  to  do,  and  what  it  must  do,  whether  it  makes  a 
profit  or  loss  out  of  it,  is  to  steady  the  price  of  the 
stock.     If  people  come  in  to  buy  six  or  seven  thousand 


28 

shares  of  stock,  and   there  is   not  much  around,  if  they 
do  not  sell  the  stock  it  will  be  bid  away  up  and   have  a 
big  advance.     On  the  other  hand,  if  somebody  comes  in 
to   sell   six   or  seven   thousand   shares   and   there   are 
no    large    buying  orders    in  there    the    price    of    the 
stock    is    going  to    be    a    great    deal    lower    than    it 
would    be  otherwise.     If  you   put   in    buying    orders 
on  a    scale  down    and  selling    orders  on    a  scale    up 
the  effect  of  that  is  to  steady  the  price  of  the  stock.    Its 
fluctuation   is  not   as  violent  or   as  wide  as  it  would  be 
otherwise.     Mr.    Untermyer  :  You  are  a   believer  then 
in   manipulation,   Mr.    Henry  ?     Mr.  Henry  :  I  do  not 
know  anything  about  manipulation.     Mr.  Untermyer  : 
Is   not  the   process  you  have  just  described  a   process 
of  manipulation  ?     Mr.    Henry  :  I   do    not  think    so. 
Mr.   Untermyer  :  You  say   you  do   not  know  anything 
about  it  ?     Mr.    Henry  :  I  do   not  think  the   process   I 
have  just  described  is  what  is  usually  termed  manipula- 
tion.    Mr.    Untermyer  :  If   a  banking  house  wants  to 
protect  a  new^  stock,   why  does   it  not  simply  buy  that 
stock  from   outsiders  who   offer  it  instead  of  trading  in 
it  by  buying  and  selling  itself  ?     Mr.  Henry  :  Because 
you  cannot  make  only  one  side  of  a  market.     You  have 
to  make  both  sides  of  the  market.     Mr.  Untermyer  : 
And  why   can  it  not  buy  that  stock  and  sell  it,  when  it 
is   acquired,  instead   of  putting   in  orders   every  day — 
buying  orders  on  a  scale  and  selling  orders  on  a  scale — 
for    the    purpose    of    creating    an     apparent    activity 
in   that   stock   that   does  not   exist  ?     Mr.  Henry  :   It 
does  not  do  anything  of  the  kind,  Mr.  Untermyer.     Mr. 
Untermyer  :  Do  you   not  know,  Mr.   Henry,  that  when 
you   are  trying   to  make  a  market   for  a   stock  in   that 
way,  by  putting  in  buying  and  selling  orders  by  different 
brokers   for   the  same   house,  that   you  are  creating   a 
fictitious   appearance  of  activity?     Mr.   Henry:   You 
would   be  if  they  were  at  the  same  price.     Mr.  Unter- 
myer :  But   even  if   there  is   a  difference  of   one- eighth 
in  the  price  ?     Mr.  Henry  :  Not  an  eighth.     If  you  put 
in  a  scale  of  selling  orders  above  a  price  and  a   scale  of 
buying   orders   below   a  price,  I   see  no   manipulation 
about  that.   Mr.  Untermyer  :   You  see  no  manipulation 
in  that  at  all  ?    Mr.  Henry  :  No,  sir.   Mr.  Untermyer  : 
What  do   you  understand  manipulation  to   be  ?     What 
is  your  idea  of  manipulation  ?    Mr.  Henry  :   I  suppose 
it  might  be  defined  as  matching  orders.     Mr.  Unter- 
myer :   Do  you  not  understand,  Mr.  Henry,  that  match- 
ing orders  and  .manipulation  are  different  things  ?     Mr. 
Henry  :   I  know  very  little  about  manipulation.     I  have 
no   personal  experience,  Mr.  Untermyer.     Mr.   Unter- 


29 

MYER ;  But  that  is  because  you  do  not  think  this  is 
manipulation  that  you  have  been  doing  ?  Mr.  Henry  : 
I  do  not  know  what  term  you  want  to  use.  What  we 
have  been  doing  is  to  steady  the  price.  It  is  not 
manipulation.  *  *  *  Mr.  Untermyer:  Do  you 
know  whether  you  made  any  money  in  this  market 
operation  ?  Mr.  Henry  :  I  think  we  lost  money 
in  it.  Mr.  Untermyer:  You  think  you  lost?  Mr. 
Henry  :  Yes.  Mr.  Untermyer  :  You  expected  to  lose 
money,  did  you  not?  Mr.  Henry:  We  did.  Mr. 
Untermyer:  You  were  in  it  to  lose  money? 
Mr.  Henry:  Yes.  Mr.  Untermyer:  And  you  were 
willing  to  lose  money  in  order  to  make  this  ap- 
pearance of  activity  in  the  market?  Mr.  Henry: 
Not  to  make  any  fictitious  appearance  of  ac- 
tivity. Mr.  Untermyer:  Y^ou  think  it  was  real?  Mr. 
Henry  :  We  were  willing  to  lose  money  to  give  the 
stock  a  real  market.  That  is  what  we  have  done.  Mr. 
Untermyer  :  What  is  the  difference  between  a  real 
market  and  a  fictitious  market?  Mr.  Henry:  A  great 
deal  of  difference.  Mr.  Untermyer  :  Explain  it.  Mr. 
Henry  :  A  real  market  means  that  if  a  man  has  stock 
to  sell  he  can  go  and  sell  it  and  find  a  buyer  who  will 
buy  it  and  pay  money  for  it,  that  if  h©  wants  to  buy 
he  can  go  and  buy  it  and  find  a  sellei*  who  will  sell  it 
and  deliver  it  to  him,  and  he  will  be  able  to  give  a 
check  and  become  the  owner  of  it.  That  is  what  I 
mean  by  a  real  market.  That  is  what  has  existed  in 
California  Petroleum  ever  since  it  has  been  on  the 
board." 

In  this   discussion   Mr.    Henry   was   clearly   in   the  right.    ^ 
This  is  confirmed  by  the  statements   made  to  this  Committee 
by  Mr.  Van  Antwerp  (R.,  118-120)   and  Mr.  Noble    (R.,  172, 
173). 

That  the  stock  has  gone  down  in  price  since,  for  whatever 
the  reason  may  be,  is  no  evidence  that  there  was  manipulation 
any  more  than  it  will  be  evidence  of  manipulation  if  the  enter- 
prise fulfils  the  hopes  of  its  promoters  and  the  price  goes  up 
again.  Many  other  well  known  and  established  stocks  have 
fallen  more  points  during  the  same  period  of  time  than  the 
stock  of  the  California  Petroleum  Company,  with  no  sugges- 
tion or  thought  on  the  part  of  anybody  of  manipulation. 

These  being  the  facts,  there  was  no   occasion  for  punitive 


30 

action  on  the  part  of  the  Exchange.  What  was  done  was  not 
a  violation  of  any  rule  of  the  Exchange.  The  transactions  on 
the  Exchange  were  perfectly  legitimate,  and  to  adopt  a  rule 
preventing  them  would  be  not  only  unwise  and  impolitic, 
but  a  great  injury  to  the  investing  public. 

(3)  We  have  now  gone  over  all  the  instances  constituting 
the  case  made  to  show  widespread  manipulation  vitiating  the 
quotations  of  the  exchange  to  such  an  extent  as  to  require 
radical  legislation  for  the  purification  of  the  mails  ;  and  on  which 
the  indictment  of  the  Exchange  by  the  Pujo  committee  on 
this  charge  is  based.  None  of  them  involves  manipula- 
tion properly  defined.  There  is  no  evidence  anywhere  i^ 
the  Pujo  record  showing  definite  instances  of  manipula- 
tion. It  is  not  necessary  for  us  to  argue  that  in  past 
times  there  has  not  been  manipulation  consisting  of  contem- 
poraneous buying  and  selling  orders  to  bring  about  a  higher 
level,  or  a  lower  level,  of  prices,  or  fictitious  activity  for  purely 
speculative  purposes.  But  it  was  always  sporadic  in  its  nature. 
It  has  practically  died  out  with  changing  conditions  and 
standards  reflected  in  the  rules  of  the  Exchange.  The  trans- 
actions of  the  Exchange  from  day  to  day  are  free  from  it  in 
any  degree,  and  its  quotations  express  the  results  of  actual  and 
legitimate  transactions  and  market  conditions. 


IV. 

The  rules  adopted  by  tlie  Ilxchange  to  prevent 
manipulation  and  improper  speculation. 

(1)  Kules  bearing  on  manipulation. 
•  (a)  The  constitution,  which  was   adopted   more   than  fifty 
years  ago,  contains  these  three  provisions  : 

"  The  Governing  Committee   may,   by   a   vote   of  a 
majority  of  all  its  existing  members,  suspend   from  the 


31 

Exchange  for  a  period  not  exceeding  one  year,  any 
member  who  may  be  adjudged  guilty  of  any  act  which 
may  be  determined  by  said  Committee  to  be  detri- 
mental to  the  interests  or  welfare  of  tlie  Exchange " 
(Art.  17,  §  8). 

"  A  member  who  shall  have  been  adjudged,  by 
a  majority  vote  of  all  the  existing  members  of  the 
Governing  Committee,  guilty  of  ^  *  *  any  con- 
duct or  proceeding  inconsistent  with  just  and  equitable 
principles  of  trade,  may  be  suspended  or  expelled  as 
the  said  Committee  may  determine,  unless  some  other 
peualty  is  expressly  provided  for  such  ofifense  "  (Art. 
17,  §  6). 

"  Fictitious  transactions  are  forbidden.  Any  member 
violating  this  rule  shall  be  liable  to  suspension  for  a 
period  not  exceeding  twelve  months  "  (Art.  23,  §  8). 

This  provision  relating  to  fictitious  transactions  has  always 
been  construed  to  prohibit  "  matched  orders ",  "  washed 
sales ",  and  all  other  devices  the  result  of  which  is  that 
there  is  an  apparent  but  not  a  real  transaction.  There 
never  has  been  a  time  when  two  men  could  meet  on 
the  floor  of  the  Exchange  and  go  through  forms  which 
were  really  the  mere  pretense  of  an  actual  trans- 
action. The  other  provisions  constitute  the  sweeping 
powers  of  the  Exchange  to  punish  any  act  which  either  im- 
pairs the  reputation  of  the  Exchange  and  its  transactions  or 
conflicts  with  absolute  fair  dealing.  Under  these  provisions 
no  member  can  do  an  act,  or  pursue  a  course  of  conduct,  of  an 
injurious  character  towards  the  public  or  a  fellow  member 
without  bringing  himself  within  the  disciplinary  power  of  the 
Governors,  regardless  of  whether  it  is  an  act  violative  of  legal 
rights  or  not. 

(5)  On  December  14,  1898,  the  following  resolution  was 
adopted  by  the  Board  of  Governors  : 

*'  That  where  parties  have  orders  to  buy  and  orders 
to  sell  the  same  security,  said  parties  must  offer  said 
security,  whether  it  be  stocks  or  bonds,  at  one-eighth 
per  cent,  higher  than  their  bid  before  making  transac- 
tions with  themselves." 


v/ 


32 

This  rule  prevents  a  broker  who  has  both  orders  to  sell  and 
orders  to  buy  from  dealing  with  himself  for  both  of  his  princi- 
pals without  any  public  oflfering  in  requiring  him  to  first  make 
public  the  price  at  which  he  is  willing  to  buy  and  the  price 
at  which  he  is  willing  to  sell,  with  an  eighth  difiference  be- 
tween them,  so  that  anyone  may  accept  either.  The  effect  of 
this  is  that  a  man  cannot  record  as  transactions  dealings  of 
his  own  for  two  principals  without  the  opportunity  to  every 
broker  desiring  to  buy  or  to  sell  to  deal  with  him. 

(c)  On  March  30,  1910,  the   following  rules  were  adopted 
which,  as  amended  May  12,  1911,  read : 

"  1.  That  the  recognized  quotation  on  stocks  shall 
be  public  bids  and  offers  on  lots  of  100  shares. 

"  2.  All  bids  and  offers  on  larger  lots  shall  be  con- 
sidered to  be  for  any  part  thereof  in  lots  of  100  shares 
or  of  multiples  thereof,  whether  so  stated  in  the  bid  or 
offer  or  not. 

"  3.  If  a  bid  is  made  for  a  larger  lot  of  stock  above 
the  price  at  which  smaller  lots  are  offered,  or  if  a  trans- 
action is  made  in  a  larger  lot  above  the  price  at  which 
smaller  lots  are  offered,  such  bidder  or  buyer  shall  be 
compelled  to  buy  any  or  all  of  the  smaller  lots  which 
were  publicly  offered  at  the  time,  at  the  lower  price,  up 
to  the  amount  of  the  bid  for  the  larger  lot.  If  the  bid 
for  the  larger  lot  is  accepted,  and  the  buyer  is  unwilling 
to  buy  more,  the  seller  must  give  up  to  the  members 
who  were  publicly  offering  to  sell  at  the  lower  price, 
such  amounts  as  they  were  publicly  offering  to  sell  at 
the  lower  price,  if  such  claim  is  made  immediately. 

"  4.  If  an  offer  is  made  to  sell  a  larger  lot  of  stock 
below  the  price  which  is  bid  for  smaller  lots,  or  if  a 
transaction  is  made  in  a  larger  lot  below  the  price 
which  is  bid  for  smaller  lots,  such  member  offering  to 
sell,  or  the  seller,  shall  be  compelled  to  sell  any  or  all 
of  the  smaller  lots  which  were  publicly  bid  for  at  the 
time,  at  the  higher  price,  up  to  the  amount  of  the  offer 
of  the  larger  lot.  If  the  offer  of  the  larger  lot  is  ac- 
cepted, and  the  seller  is  unwilling  to  sell  more,  the 
buyer  must  give  up  to  the  members  who  are  publicly 
bidding  the  higher  price,  such  amounts  as  they  were 
publicly  bidding  fox,  at  the  higher  price,  if  such  claim 
is  made  immediately. 

*'5.  A  member  may  sell  on  offer  the  largest  amount 
bid  for  without  regard  to   priority  of  bids.     Should  the 


33 

offer  be  of  an  amount  larger  than  the  largest  bid,  the 
balance  shall  go  to  the  next  largest  bidder  in  sequence  ; 
bids  for  equal  amounts  being  on  a  par. 

"  A  member  may  buy  on  bids  under  the  same  rule. 
**  6.    Attention   is  directed  to  the  resolution  of  the 
Governing  Committee  adopted  October  26,  1892,  which 
reads  as  follows  : 

*  When  a  purchase  or  sale  is  claimed  by  a  party 
who  states  that  he  had   on  the  floor  a  prior  or  bet- 
ter   bid  or  offer   such  claim  shall  not  be  sustained 
if  the  bid  or  offer  was  not  made  with  the  publicity 
and  frequency  necessary  to  make  the  existence  of 
such   bid  or  offer   generally  known   at  the  time  of 
the  transaction.' 
"  7.  Disputes  arising  from  a  question  as   to  priority 
of  bid  or  offer,  if  not  settled  by  agreement   between  the 
members   interested,  shall   be   settled  by  vote   of   the 
members  knowing  of  the  transaction  in  question. 

"  Disputes  as  to  the  application  of  rules  relating  to 
the  transaction  in  question,  if  not  settled  by  agreement 
between  the  members  interested,  shall  be  settled  by  any 
member  of  the  Committee  of  Arrangements. 

"  8.  The  above  rules  shall  not  apply  to  lots  of  less 
than  100  shares,  nor  to  active  openings  when  bids  and 
offers  are  simultaneous." 

A  short  explanation  is  necessary  to  make  this  group  of  rules 
clear.  Before  they  were  adopted  it  was  possible  for  a  broker 
to  offer  to  buy  a  large  quantity  of  shares,  say  ten  thousand,  at 
a  price  named  by  him,  say  61,  all  or  none,  and  there  might  be 
no  broker  having  such  a  block  of  shares  to  sell,  or  only  a 
broker  there  by  prearrangement.  But  there  might  be  a  number 
of  brokers  present  who  were  willing  to  sell  smaller  lots  at  that 
price  or,  say  60J  or  60.  The  effect  of  these  rules  is  to  require 
the  man  who  made  the  bid  for  ten  thousand  shares  to  take 
any  or  all  of  the  smaller  offerings  up  to  the  amount  of  his  bid, 
thus  not  only  preventing  any  prearranged  plan  being  carried 
out  but  furnishing  a  market  for  all  the  smaller  lots  offered. 
The  rules  have  precisely  the  same  effect  with  respect  to  a  man 
offering  to  sell  a  large  block  of  stock.  They  have  proved  to  be 
most  efficacious  in  establishing  a  broad  and  open  market  and 
preventing  collusive  trading. 


34 

(d)  On  February  5th,  1913,  the  following  rule  was  adopted  : 

"  That  no  Stock  Exchange  member,  or  member  of  a 
Stock  Exchange  firm,  shall  give,  or  with  knowledge  ex- 
ecute, orders  for  the  purchase  or  sale  of  securities 
which    would  involve  no  change  of  ownership. 

*'  The  punishment  for  this  offense  shall  be  as  pre- 
scribed in  Section  8  of  Article  XXIII  of  the  Constitu- 
tion regarding  fictitious  transactions." 

(e)  On  February  13,  1913,  another  rule  was  adopted,  which 
reads  as  follows : 

**  That  reckless  or  unbusinesslike  dealing  is  contrary 
to  just  and  equitable  principles  of  trade,  and  the  offend- 
ing member  shall  be  subject  to  the  penalties  provided 
in  Section  6  of  Article  XVII  of  the  Constitution,  in 
every  case  in  which  the  offense  does  not  come  within 
the  provisions  of  Section  5  of  Article  XVI  thereof." 

(f)  On  March  5,  1913,  the  following  amendment  to  the 
Constitution  was  adopted : 

**  A  Committee  on  Business  Conduct,  to  consist  of 
y  five  members. 

"  It  shall  be  the  duty  of  this  Committee  to  consider 
matters  relating  to  the  business  conduct  of  members 
with  respeet  to  customers'  accounts. 

"  It  shall  also  be  the  duty  of  this  Committee  to 
keep  in  touch  with  the  course  of  prices  of  securities 
listed  on  the  Exchange,  with  the  view  of  determining 
when  improper  transactions  are  being  resorted  to. 

"  It  shall  have  power  to  examine  into  the  dealings 
of  any  members,  with  respect  to  the  above  subjects,  and 
report  its  findings  to  the  Governing  Committee." 

It  has  always  been  a  standing  rule  of  the  Stock  List  Com- 
mittee, as  a  measure  preventive  of  manipulation,  to  decline  to 
list  a  stock  unless  it  appeared  that  a  sufficient  quantity  of  it 
was  owned  by  the  public. 

Another  measure  of  the  same  kind  is  the  rule  empowering 
the  Committee  on  Stock  List  to  strike  a  security  from  the 
list  whenever  the  amount  outstanding  has  become  so  reduced 
as  to  make  further  dealings  in  it  upon  the  Exchange  inadvis- 
able, and  the  provision   of   the   Constitution  authorizing  the 


35 

Board  of   Governors   to  take   similar  action  (Art.  XXXIIL, 
Sec.  4). 

A  distinct  evolution  is  traceable  in  these  rules  which 
we  have  grouped  together.  From  the  beginning  simulated 
transactions  of  all  kinds  have  been  prohibited.  In  1898  this 
prohibition  was  broadened  out  to  prevent  the  same  broker 
having  orders  to  buy  and  sell  from  dealing  with  himself  as  the 
representative  of  both  principals  without  any  public  offering. 
Behind  these  special  rules  were  the  general  provisions  denounc- 
ing acts  or  conduct  contrary  to  fair  dealing  or  detrimental  to 
the  interests  of  the  Exchange.  These  rules  taken  together 
compelled  real  transactions,  but  did  not  prohibit  simultaneous 
orders  to  buy  and  sell,  emanating  from  the  same  man  or  group 
of  men  if  in  their  execution  every  transaction  was  real  and 
free  from  collusion,  and  otherwise  conformed  to  the  rules,  un- 
less they  involved  a  scheme  of  fraud  denounced  by  the  article 
of  the  constitution  in  relation  to  fraudulent  transactions, 
which  reads  : 

"  A  member  who  shall  be  adjudged,  by  a  two- thirds 
vote  or  all  of  the  existing  members  of  the  Governing 
Committee,  to  be  guilty  of  fraud  or  of  fraudulent  acts, 
shall  be  expelled  and  the  President  shall  so  declare ; 
public  announcement  of  the  expulsion  shall  be  made  to 
the  exchange  and  the  membership  shall  be  forthwith 
disposed  of  by  the  Committee  on  Admissions  "  (Article 
XVII.,  Section  2). 

This  was  the  situation  down  to  1910  ;  and  under  the  opera- 
tion of  these  rules,  the  action  of  the  authorities  of  the  Ex- 
change in  enforcing  them,  and  the  changing  conditions  and 
standards  of  the  time,  manipulation  consisting  of  con- 
certed contemporaneous  orders  to  raise  or  depress  the 
price  of  a  stock  for  speculative  purposes  gradually  dis- 
appeared. The  rules  of  1910,  adopted  as  a  result  of  the  dis- 
cussion of  the  recommendations  of  the  Hughes  Commission, 
broadening  the  market  to  protect  all  small  ofifers  and  bids  in 
connection  with  an  ofifer  or  bid  of  a  large  lot,  were  a  prevent- 
ive step  in  the   same   direction.     Kesponding  to  the  sentiment 


36 

that  nothing  shall  be  left  undone  to  prevent  such  manipulation 
in  the  future  the  rule  of  February,  1913,  has  been  adopted, 
assuring  an  actual  change  of  ownership  in  every  case,  thereby 
preventing  transactions  of  sale  and  transactions  of  purchase 
from  being  completed  with  shares  owned  by  the  same  man  or 
group  of  men.  The  appointment  of  a  Committee  pursuant  to 
the  rule  of  March  5,  1913,  to  watch  day  by  day  the  proceedings 
on  the  Exchange  and  at  once  detect  and  arrest  any  improper 
practices,  with  power  to  examine  into  the  dealings  of  members 
to  ascertain  their  true  character,  is  another  most  important  step 
in  the  same  direction.  The  preventive  efficiency  of  this  Com- 
mittee cannot  be  exaggerated.  It  practically  destroys  the 
opportunity  of  improper  practices  and  assures  the  integrity  of 
the  entire  body  of  transactions  on  the  Exchange.  No  ex- 
change here  or  abroad  has  provided  such  complete  and  eflS- 
cient  machinery  for  that  purpose. 

(2)  Rules  bearing  on  speculative  accounts. 

Until  recent  years  this  subject  was  covered  by  the  general 
rule,  to  which  we  have  already  referred,  prohibiting  acts 
detrimental  to  the  interests  or  welfare  of  the  Exchange.  That 
rule  had  always  been  regarded  as  sufficiently  comprehensive 
to  reach  the  taking  of  an  improper  account  by  a  member,  or 
the  carrying  of  it  under  improper  conditions.  In  later  years 
various  specific  rules  have  been  adopted  on  this  subject  to 
more  particularly  emphasize  the  attitude  of  the  Exchange. 
They  are  : 

(a)  On  February  9, 1898,  the  following  rule  was  adopted  : 

"  That  in  future  the  publication  of  an  advertisement 
of  other  than  a  strictly  legitimate  business  character, 
by  a  member  of  the  Exchange,  shall  be  deemed  an  act 
detrimental  to  the  interest  and  welfare  of  the  Ex- 
change." 

The  object  of  this  rule   was   to  prevent   advertisements  by 
N .  members   calculated   to  attract   the  attention   of  tbe   general 
public  and  have  the  effect  of  soliciting  business. 


§7 

Along  the  same  line  is  the  provision  of  the  Constitution 
prohibiting  the  employment  of  agents  for  the  solicitation  of 
business  (Art.  XXXV.,  Section  6)  and  a  rule  adopted  January 
23,  1901,  declaring— 

"  That  the  employment  of  a  clerk  or  clerks  in  a 
nominal  position  because  of  the  business  obtained  by 
such  clerk  or  clerks  for  their  employer,  is  a  violation  of 
the  rules." 

{h)  On  May  9,  1900,  the  following  rules  were  adopted  : 

*'  First.  That  hereafter  no  member  of  the  Stock  Ex- 
change and  no  firm  of  which  such  member  is  a  partner, 
shall  establish  telephonic  or  telegraphic  wire  connection 
between  the  office  of  such  member  or  firm  and  the  office 
of  any  firm  or  individual  not  a  member  of  the  Stock 
Exchange  transacting  a  banking  or  brokerage  business, 
unless  application  therefor  shall  first  be  made  to  the 
Committee  of  Arrangements,  and  shall  have  been  ap- 
proved by  them. 

"  Second.  Every  such  telephonic  or  telegraphic  wire 
connection  which  shall  be  so  authorized  by  the  Com- 
mittee of  Arrangements,  as  well  as  all  existing  tele- 
phonic or  telegraphic  wire  connections  of  the  same 
character,  shall  be  registered  with  the  Committee  of 
Arrangements,  who  shall  make  such  regulations  govern- 
ing the  matter  as  they  deem  necessary. 

"  Third.  That  the  Committee  of  Arrangements  shall 
have  power,  at  any  time,  in  their  discretion,  to  order 
any  connection  of  the  character  described  in  these  reso- 
lutions to  be  discontinued." 

These  rules  vest  the  control  of  the  wire  connections  of  a 
member's  office  in  the  Committee  of  Arrangements,  made  up  of 
members  of  the  Board  of  Governors,  to  prevent  improper  con- 
nections of  every  kind  ^nd  description.  They  have  been 
criticised  as  conferring  an  unjust  and  arbitrary  power  on  the 
Governors,  but  it  is  quite  plain  that  it  is  a  proper  and  neces- 
sary power.  Through  its  means  the  authorities  of  the  Ex- 
change know  of  every  wire  connection  with  a  member's  office, 
and  whether   or  not   it   is   an   undesirable   connection   with 


38 

reference  to  the  nature  of  the  business  that  it  would  originate 
and  bring  on  to  the  floor  of  the  Exchange.  If  it  is  they  can 
direct  its  discontinuance. 

(c)  On  May  19,  1909,  the  following  rule  was  adopted  : 

"  That  any  member  of  this  Exchange  who  is  inter- 
ested in,  or  associated  in  business  with,  or  whose  oflSce 
is  connected  directly  or  indirectly  by  public  or  private 
wire  or  other  contrivance  with,  or  who  transacts  any 
business  directly  or  indirectly  with  or  for  any  organiza- 
tion, firm  or  individual  engaged  in  the  business  of  deal- 
ing in  differences  or  quotations  (commonly  called  a 
**  bucket  shop")  shall,  on  conviction  thereof,  be  deemed 
to  have  committed  an  act  or  acts  detrimental  to  the  in- 
terests and  welfare  of  this  Exchange." 


k/ 


This  rule  specifically  prevents  any  association  of  any  kind 
between  a  member  or  his  firm  and  others  which  might  result 
in  business  being  drawn  to  the  Exchange  from  any  person  or 
concern  engaged  in  transactions  such  as  are  carried  on  in 
"  bucket  shops." 

{d)  On  March  30,  1910,  the  following  rule  was  adopted  : 

"  That  the  taking  or  carrying  of  a  speculative 
account,  or  the  making  of  a  speculative  transaction  in 
which  a  clerk  of  the  Exchange  or  of  a  member  of  the 
Exchange  or  of  a  bank,  trust  company,  banker,  or  in- 
surance company  is  directly  or  indirectly  interested, 
unless  the  written  consent  of  the  employer  has  been  first 
obtained,  shall  be  deemed  an  act  detrimental  to  the  in- 
terest and  welfare  of  the  Exchange." 

This  rule  is  self-explanatory. 

{e)  On  February  13,  1913,  the  following  rule  was  adopted  : 

*'  That  the  acceptance  and  carrying  of  an  account 
for  a  customer,  either  a  member  or  a  non-member, 
without  proper  and  adequate  margin  may  constitute  an 
act  detrimental  to  the  interest  and  welfare  of  the  Ex- 
change, and  the  offending  member  may  be  proceeded 
against  under  Section  8  of  Article  XVII.  of  the  Con- 
stitution." 


39 

This  rule  is  reinforced  by  the  duty  imposed  upon  the 
Committee  on  Business  Conduct  created  by  the  resolution  of 
March  5,  1913  "  to  consider  matters  relating  to  the  business 
conduct  of  members  with  respect  to  customers'  accounts." 

The  requirement  of  a  proper  and  adequate  margin  in  con- 
nection with  the  accounts  of  customers  strikes  us  as  much 
more  desirable  than  an  effort  to  prescribe  the  amount  of  the 
margin.  The  Hughes  Commission  said  in  its  report  that  "  the 
amount  of  margin  which  a  broker  requires  from  a  speculative 
buyer  of  stocks  depends  in  each  case  on  the  credit  of  the 
buyer  ;  and  the  amount  of  credit  which  one  person  may  ex- 
tend to  another  is  a  dangerous  subject  on  which  to  legislate." 
Every  case  stands  on  its  circumstances  ;  on  the  personality  of 
the  customer,  his  position,his  credit  and  financial  responsibility  ; 
and  it  seems  to  us  that  a  general  rule  requiring  under  the  cir- 
cumstances of  each  case  a  proper  and  adequate  margin  is 
wiser  and  more  effective  than  a  rule  simply  prescribing  a 
definite  minimum  amount  in  all  cases. 

This  body  of  rules  respecting  speculative  accounts  meets 
every  situation  that  experience  has  developed.  It  is  certainly 
comprehensive  as  it  brings  within  its  sweep  advertising,  solicit- 
ing for  business,  wire  connections,  the  prohibition  of  dealings 
with  classes  of  individuals  because  of  the  nature  of  their  employ- 
ment, and  the  margining  of  accounts  of  customers.  There 
has  been  no  suggestion  of  any  conditions  that  are  not  covered 
by  these  rules  in  the  Pujo  Report  or  elsewhere.  If  any  need 
for  additional  rules  is  developed  the  Board  of  Governors  may 
be  depended  upon  to  put  them  in  operation.  There  is  no 
basis  for  any  reasonable  criticism  of  the  attitude  or  regula- 
tions of  the  Exchange  respecting  speculative  accounts. 

(3)  Section  9  of  Article  XI  of  the  Constitution  provides 
that  the  Law  Committee  "  is  authorized  and  empowered, 
whenever  the  Committee  shall  deem  it  to  be  for  the  interest  of 


40 

the  Exchange  to  examine  into   the  dealings   of   any  member  of 
the  Exchange." 

Section  7  of  Article  XVII.  provides  as  follows  : 

*'  The  Governing  Committee  may,  by  a  two-thirds 
vote  of  its  members  present,  require  that  a  member  of 
the  Exchange  shall  submit  to  the  Governing  Committee 
or  any  Standing  or  Special  Committee,  for  examination, 
such  portion  of  his  books  or  papers  as  are  material  and 
/  relevant  to  any  matter  under  investigation  by  said  Com- 

mittee or  by  any  Standing  or  Special  Committee.  Any 
member  who  shall  refuse  or  neglect  to  comply  with 
such  requirement,  or  shall  willfully  destroy  any  such 
required  evidence,  or  who,  being  duly  summoned,  shall 
refuse  or  neglect  to  appear  before  the  Governing  Com- 
mittee or  any  Standing  or  Special  Committee,  as  a  wit- 
ness, or  refuse  to  testify  before  any  such  Committee, 
may  be  adjudged  guilty  of  an  act  detrimental  to  the  in- 
terest or  welfare  of  the  Exchange." 

We  have  already  called  attention  to  the  provision  of  the  reso- 
lution of  March  5,  1913,  creating  a  Committee  on  Business 
Conduct  which  empowers  it  "  to  examine  into  the  dealings 
of  any  members  "  with  respect  to  any  subjects  referred  to 
in  the  resolutions.  This  power  is  an  effective  agency 
in  safeguarding  the  transactions  on  the  Exchange  and 
the  rights  of  customers.  If  transactions  occur  which 
arouse  suspicion  complete  information  respecting  them 
can  at  once  be  obtained.  If  a  customer  complains  to 
the  authorities  of  the  Exchange  of  his  treatment  by  a 
member  they  provide  a  summary  mode  of  inquiry  into  the 
complaint.  This  power  is  constantly  exercised  for  these  and 
other  purposes.  There  has  been  criticism  of  its  exercise,  or 
rather  the  lack  of  its  exercise,  in  connection  with  cases  of  in- 
solvency ;  but  the  power  was  not  conferred  to  enable  the 
authorities  to  keep  track  from  day  to  day  of  the  sol- 
vency of  the  hundreds  of  members  who  are  dealing  on  the 
Exchange.  It  is  obvious  that  without  a  corps  of  accountants 
almost   as   large   as   the  active  membership  of  the   Exchange 


41 

itself  it  would  be  impossible  to  exercise  that  function, 
and  particularly  in  view  of  the  fact  that  the  conditions  that 
determine  the  solvency  of  an  active  member  are  fluctuating 
from  day  to  day  and,  what  is  more  important,  the  main  factor 
is  almost  invariably  one  developed  in  a  time  of  crisis.  There 
are  but  few  cases  of  insolvency,  considering  the  large  active 
membership  of  the  Exchange,  and  the  records  show  that  they 
are  almost  entirely  confined  to  times  of  abnormal  conditions. 
There  has,  for  instance,  been  only  one  failure  in  the  last 
twenty-one  months,  which  was  not  at  all  due  to  Stock  Ex- 
change transactions,  but  entirely  to  unfortunate  outside  in- 
vestments and  enterprises. 

(4)  We  submit  that  this  body  of  rules  establishes  care,  vigi- 
lance and  efficiency  on  the  part  of  the  governing  authorities  in 
safeguarding  transactions  on  the  Exchange.  In  their  enforce- 
ment the  disciplinary  power  of  the  Board  of  Governors  has 
been  rigidly  exercised.  There  are  intimations  of  criticism 
with  respect  to  the  penalties  imposed  in  some  cases,  but  with- 
out any  presentation  of  the  records  in  those  cases  on  which  the 
Governors  acted.  Having  an  extensive  knowledge  of  this 
subject  we  can  say  without  any  qualification  that  this  power 
has  been  uniformly  exercised  with  ability,  fairness  and  justice. 


V. 

The  alleged  diversion  of  bank  funds  and  of 
capital  from,  productive  industry  to  loans  in  aid 
of  speculation  on  the  Stock  Exchange. 

The  substance  of  what  is  said  on  this  subject  in  the  Pujo 
Beport  is  (p.  45)  that  excessive  and  indiscriminate  speculation 


\^ 


42 

in  stocks  on  the  Exchange  "  withdraws  from  productive  in- 
dustry vast  quantities  of  capital ;  "  that  statements  compiled 
by  accountants  for  the  Committee,  based  on  data  obtained 
from  32  banks  and  trust  companies  in  New  York  City,  showed 
that  on  November  1,  1912,  those  institutions  for  themselves 
and  their  out-of-town  correspondents  had  outstanding  loans 
on  Stock  Exchange  collateral  amounting  to  $766,795,000 ; 
that  of  this  sum  $240,480,000  was  loaned  for  the  account  of  out- 
of-town  banks ;  that  though  this  sum  of  $766,795,000  repre- 
sents "  a  substantial  part  of  the  sum  required  to  carry  stocks 
bought  on  margin  on  the  New  York  Stock  Exchange,''  it  was 
not  the  whole  amount,  as  it  did  not  include  amounts  loaned 
by  international  banking  houses  and  other  institutions  ;  and 
that  at  that  time  "  money  was  needed  for  crop  moving  and 
other  legitimate  commercial  purposes." 

This  presentation  of  the  matter  is  not  only  grossly  ex- 
aggerated, but  in  essential  particulars  is  without  any  support 
of  fact. 

1.  Let  us  first  examine  the  statement  that  the  sum  of 
$766,795,000  was  on  November  1st,  1912,  a  ''  substantial  part 
of  the  sum  required  to  carry  stocks  bought  on  margin  on  the 
New  York  Stock  Exchange."  Was  there  any  such  sum  so 
loaned  ?  Whatever  the  true  amount  was,  was  it  all  loaned 
"  to  carry  stocks  bought  on  margin  on  the  New  York  Stock 
Exchange  ?  "     Neither  is  the  fact. 

(a)  Deducting  from  the  total  of  $766,795,000  the  sum  of 
$240,480,000,  being  the  amount  given  as  loaned  directly  for 
account  of  out-of-town  banks,  the  balance  of  $526,315,000 
represents  according  to  this  statement  the  amount  advanced 
by  those  New  York  banks  and  trust  companies  on  their 
own  account.  We  have  from  the  32  banks  and  trust 
companies  referred  to  in  the  Pujo  report  statements  show- 
ing the  amounts  actually  loaned  by  them  on  their  own  account 
to  stock  brokers  in  New  York  City,  whether   members  of  the 


43 

Exchange  or  not,  on  the  date  mentioned,  which  show  that  the 
actual  amount  so  loaned  was  $296,800,101.  This  shows  that 
the  sum  of  $766,795,000  given  in  the  Pujo  report  as  sub- 
stantially "  the  sum  required  to  carry  stocks  bought  on  margin 
on  the  New  York  Stock  Exchange  "  is  at  any  rate  exaggerated 
to  the  extent  of  $229,514,899. 

We  have  no  means  of  ascertaining  what  proportion  of  the 
$240,480,000  loaned  directly  for  the  account  of  out-of-town 
banks  was  loaned  to  stock  brokers,  but  the  probabilities  are 
that  if  the  facts  could  be  ascertained  that  sum  would  also  be 
materially  reduced. 

No  doubt  this  error  amounting  to  $229,514,899  is  due  to  the 
fact  that  the  Pujo  report  is  not  a  correct  representation  of  the 
statements  furnished  by  the  banks  and  trust  companies  to  the 
Committee.  What  the  banks  and  trust  companies  were  required 
to  furnish  was  their  loans  made  "  on  Stock  Exchange  and  other 
kindred  securities."  Pujo  Test.,  p.  1192.  In  the  report  these 
become  loans  "  to  carry  stocks  bought  on  margin  on  the 
New  York  Stock  Exchange."  We  shall  show  before  we  get 
through  that  there  is  a  great  difference  between  the  two. 

On  the  date  mentioned,  November  1, 1912,  the  63  banks  and 
trust  companies  belonging  to  the  New  York  Clearing  House 
Association  reported  total  loans  of  all  kinds  of  $1,923,374,000. 
As  it  is  customary  for  the  New  York  banks  to  carry  "  securities 
owned  "  by  them  as  loans  in  the  weekly  Bank  Statement,  at 
least  $400,000,000  must  be  deducted  from  this  figure,  leaving 
$1,523,374,000  as  the  net  amount  actually  loaned  by  these  in- 
stitutions to  all  classes  of  borrowers  in  New  York  and  else- 
where. As  most  of  the  banks  and  trust  companies  in  this  list 
outside  of  the  32  referred  to  in  the  Pujo  report  do  not  engage 
in  the  business  of  making  loans  to  stockbrokers,  the  sum  of 
$296,800,101  shown  above  to  have  been  loaned  by  the  32  New 
York  banks  and  trust  companies  on  their  own  account  to 
stockbrokers  on  that  day  may  fairly  be  taken  as  substantially 
the  whole  amount  so  loaned  to  them.     Thus  out  of  total  loans 


44 

on  November  1,  1912,  of  $1,523,374,000  tlie  sum  of  $296,- 
800,101  was  loaned  to  stockbrokers,  and  $1,226,573,899  was 
loaned  to  all  other  classes  of  borrowers.  Loans  to  stock- 
brokers, therefore,  constituted  but  19 J  per  cent,  of  the  total. 

Put  in  another  way,  more  than  $1,200,000,000  was  loaned 
to  supply  the  needs  of  the  country  at  large  as  against 
$290,000,000  loaned  to  stockbrokers.  That  this  is  the 
normal  relation  of  the  two  classes  of  loans  is  shown  by  an- 
other computation  made  as  of  September  24,  1913.  On  that 
date  the  total  loans  of  the  same  63  banks  and  trust  companies 
for  their  own  account  amounted  to  $1,226,974,500.  Of  this 
amount  the  total  loans  to  stockbrokers,  according  to  figures 
supplied  by  the  banks,  were  $264,383,800.  The  geographical 
distribution  of  the  remaining  loans  was  as  follows  : 

Eastern  States  (east  of  the  Ohio) $617,830,800 

Southern  States 174,140,500 

Western  States... ._ 167,720,600 

Foreign  (Canada,  etc.) 2,898,800 

Our  information  is  that  this  is  a  fairly  representative  state- 
ment of  the  amount  and  distribution  of  the  loans  of  the  New 
York  banks  and  trust  companies  at  any  corresponding  time 
within  the  last  five  years.  The  crop  moving  period  begins 
early  in  September  and  extends  to  the  end  of  the  year,  but  the 
largest  demand  on  New  York  for  money  for  that  purpose 
occurs  in  the  early  period. 

There  is  additional  light  to  be  thrown  on  this  subject  from 
still  another  quarter.  The  Comptroller's  call  for  November 
26th,  1912,  shows  that  the  total  loans  of  the  national  banks  of 
the  country  on  that  day  were  $6,059,982,029.  This  is  the 
call  nearest  to  the  date  given  in  the  Pujo  report, 
namely,  November  1,  1912.  Assuming  the  loans  to 
stockbrokers  in  the  City  of  New  York  to  have  been 
substantially  the  same  on  November  26th,  1912,  as 
they     were     on     November    1,    1912,    we    have    a    total  of 


45 

such  loans  by  the  New  York  banks  and  trust  companies  on 
their  own  account  and  made  by  them  directly  for  out-of-town 
banks  of  $537,280,101.  Thus  the  total  loans  to  stockbrokers 
in  New  York  City  on  that  date  were  about  8.8  per  cent,  of  the 
total  loans  of  all  the  national  banks  of  the  country. 

(b)  But  these  loans  made  to  stockbrokers  are  not  to  a  con- 
siderable extent  made  "  to  carry  stocks  bought  on  margin  on 
the  New  York  Stock  Exchange."  Loans  are  being  constantly 
made  to  brokers  upon  the  security  of  State,  municipal  and 
railroad  bonds  and  short-term  notes,  most  of  which  are  not 
traded  in  at  all  on  the  Stock  Exchange.  Issues  of  State, 
county  and  municipal  bonds  from  all  over  the  country,  in- 
cluding very  large  issues  of  New  York  State  and  City  bonds, 
are  bought  by  New  York  brokers  who  borrow  a  large  part 
of  the  purchase  price  to  carry  them  during  the  interval 
that  they  are  disposing  of  them  to  their  customers. 
These  dealings  continually  reach  to  a  very  large  sum,  be- 
cause New  York  is  the  most  important  market  for  such  secur- 
ities. There  are  to-day  such  bonds  to  the  par  value  of  many 
millions  of  dollars  in  the  hands  of  brokers  that  are  being  sold 
to  their  customers  daily  and  which  they  are  carrying  by  means 
of  such  loans. 

Loans  are  also  constantly  made  to  brokerage  houses  to 
carry  underwriting  syndicates  in  the  interval  between  the 
bringing  out  of  the  new  securities  and  their  purchase  by  in- 
vestors. These  are  favorite  loans  with  the  banks,  because 
they  are  shdrt  time  loans  and  exceptionally  secured. 

These  are  merely  instances  of  loans  made  on  "  Stock  Ex- 
change and  other  kindred  securities  "  that  are  not  loans  made 
"  to  carry  stocks  bought  on  margin  on  the  New  York  Stock 
Exchange." 

Moreover  the  New  York  banks  loan  large  sums  of  money 
to  individuals,  firms  and  corporations  for  their  business  pur- 
poses upon  the  security  of  "  Stock  Exchange  and  other  kin- 
dred securities."     Loans  of  this  character  have  been  very  com- 


46 

mon  during  the  last  few  years,  and  are  an  important  factor 
during  periods  of  financial  stringency  when  merchants  find  it 
difficult  to  market  their  paper.  A  large  number  of  more  im- 
portant mercantile  borrowers  have  come  to  regard  their  bond 
holdings  as  a  sort  of  secondary  reserve  for  use  when  their 
paper  is  moving  slowly,  and  the  same  is  true  of  interior  banks. 
It  is  also  the  fact  that  loans  of  this  character  to  a  large 
extent  are  made  for  the  purpose  of  investment.  In  confirma- 
tion we  quote  from  the  "  Keport  on  the  Finances "  by  the 
Director  of  the  Mint,  bearing  date  of  January,  1914,  where 
it  is  said  (p.  362) : 

"  The  great  supply  of  dividend-paying  stocks  and 
bonds  now  in  the  possession  of  the  public  afifords  a 
most  convenient  facility  by  means  of  which  loans  may 
be  obtained.  No  doubt  there  is  a  great  deal  more  bor- 
rowing for  miscellaneous  investments  upon  the  securi- 
ties of  a  corporation  whose  issues  are  widely  distributed 
than  there  was  upon  the  credit  of  the  same  business 
before  it  was  incorporated  or  while  the  ownership  was 
in  a  few  hands.  Perhaps  it  is  not  too  much  to  say  that 
in  times  of  prosperity,* when  the  spirit  of  money-making 
is  infectious,  it  is  difficult  for  the  average  man  to  keep 
good  collateral  in  his  own  box  while  many  inviting 
opportunities  for  investment  pass  by." 

If  the  figures  could  be  obtained  whereby  it  could  be  ascer- 
tained what  part  of  the  $766,795,000  mentioned  in  the  Pujo 
report  consisted  of  loans  "  to  carry  stocks  bought  on  margin 
on  the  New  York  Stock  Exchange  "  and  what  part  consisted  of 
loans  made  on  "  Stock  Exchange  and  other  kindred  securities  " 
for  all  these  other  purposes  we  have  mentioned,  we  have  no 
doubt  that  a  vastly  lower  figure  would  represent  the  former. 
There  is  no  justification  whatsoever  for  the  assumption  upon 
which  this  portion  of  the  Pujo  report  is  based  that  loans 
made  upon  "  Stock  Exchange  and  other  kindred  securities " 
by  the  New  York  banks  and  trust  companies  are  made  "  to 
carry  stocks  bought  on  margin  on  the  New  York  Stock 
Exchange." 


47 

2.  It  is  not  the  fact  that  the  loans  made  by  the  New  York 
banks  and  trust  companies  on  "  Stock  Exchange  and  other 
kindred  securities  "  divert  funds  from  "  crop  moving  and 
other  legitimate  commercial  purposes,"  nor  do  they  withdraw 
from  '*  productive  industry  vast  quantities  of  capital."  There 
is  no  better  illustration  of  the  true  situation  with  regard  to 
the  alleged  diversion  of  funds  when  high  money  rates  prevail 
for  call  loans  in  New  York  City  than  during  the  period  of 
financial  stringency  in  1907,  when  those  rates  were  at  their 
highest.  The  figures  compiled  by  the  United  States  Treasury 
showing  the  movement  of  money  during  that  period  are  most 
instructive  on  this  point.     They  are  as  follows  : 

Keduction  in  cash  in  National  Banks,  August  22 

to  December  3 __     $40,838,786 

Net  imports  of  gold,  November  1  to  December  31     106,403,770 

Increase  in  deposits  of  public   funds,  August   22 

to  December  3 . _ 79,834,689 

Increase  in  bank  circulation,  August  22  to  De- 
cember 3 _. _ 49,856,524 

Decrease  in  cash  in  State  Banks  and  Trust  Com- 
panies of  New  York  City,  August  22  to  Decem- 
ber 19 _.       19,191,700 

Total - , $296,125,469 

In  speaking  of  this  remarkable  absorption  of  cash  Secre- 
tary of  the  Treasury  Cortelyou  in  his  annual  report  for  1907 
said : 

*'  Of  this  great  absorption  of  currency,  amounting 
substantially  to  one-tenth  of  the  entire  estimated  money 
in  circulation  in  the  United  States,  more  than  two-thirds 
of  the  burden  fell  upon  New  York.  This  was  almost 
inevitable  from  the  fact  that  New  York  is  the  financial 
distributing  center  of  all  the  country.  The  figures  show 
that  more  than  the  entire  net  loss  in  National  Bank  re- 
serves fell  upon  the  National  Banks  of  New  York  City. 
The  National  Banks  outside  of  New  York  City,  in 
spite  of  heavy  demands  upon  them,  were  able  by  the 
aid  of  New  York  to  maintain  an  amount  of  cash  actu- 
ally larger  by  a  small  amount  on  December  3  than 
they  held  at  the  date  of  the  previous  report  to  the 
Comptroller    on    August    22,    when     conditions    were 


48 

still  relatively  tranquil.  The  National  Banks  of 
New  York  City  not  only  met  the  demand  for  currency 
until  their  reserves  were  reduced  $54,103,600  below  the 
legal  limit,  but,  in  addition,  thev  imported  and  dis- 
tributed $95,000,000  in  gokl,  and  distributed  also  in 
order  to  meet  the  demands  of  their  depositors  and 
banking  correspondents,  all  of  the  money  of  the 
Government  deposited  with  them.  The  result  was  that 
of  the  $296,000,000  currency  absorbed  throughout  the 
country,  $218,275,804  was  provided  by  the  banks  of 
New  York  City." 

This  would  appear  to  be  a  sufficient  answer  to  the  argu- 
ment that  money  can  be  kept  in  New  York,  or  drawn  to 
New  York,  by  high  rates  for  call  loans  when  it  is  needed 
in  other  parts  of  the  country  for  productive  industry, 
crop  moving  or  any  other  purpose  ;  and  the  subject  can 
be  pursued  further.  If  the  fact  is  that  in  periods 
of  unusual  demand  for  money  for  crop  moving 
or  other  purposes,  the  outflow  of  funds  from 
New  York  vastly  exceeds  the  inflow,  the  assumption  of 
the  Pujo  report  to  the  contrary  fails.  The  year  1906  was 
a  period  of  exceptional  demand  for  money  owing  to  the  busi- 
ness and  commercial  conditions  which  had  existed  for  some 
time,  and  during  thai  period  call  money  rates  touched  40  per 
cent,  per  annum  in  September,  9  per  cent,  in  October,  27  per 
cent,  in  November  and  36  per  cent,  in  December.  These  high 
rates  offered  such  an  inducement  to  foreign  institutions  to  lend 
money  in  New  York  that  approximately  $400,000,000  were 
advanced  in  1906  by  London,  Paris  and  other  foreign  centres 
to  New  York  borrowers.  This  money  went  far  to  take  the 
place  of  the  large  withdrawals  of  money  from  New  York  by 
the  interior  banks  of  the  country.  Between  August  4, 1906,  when 
the  outflow  of  currency  from  the  New  York  banks  to  the  interior 
banks  began,  and  November  9  when  the  movement  ended, 
$41,710,000  more  currency  was  sent  to  the  interior  banks  than 
was  received  from  them  in  New  York  City,  taking  no  account 
of  the  heavy  payments  to  the  Sub-Treasury  for   account  of 


49 

interior  institutions.  Thus,  instead  of  a  flow  of  money  to  New 
York  attracted  by  high  rates,  the  fact  is  that  the  flow  was 
from  New  York  to  the  interior  banks  that  they  might  meet  the 
local  demands  upon  them. 

During  a  similar  period  in  the  year  1905,  when  there 
was  a  great  demand  for  money,  the  flow  of  currency 
between  August  12  and  December  18  shows  that 
$21,749,000  more  was  sent  to  the  interior  banks  by  the  New 
York  banks  than  was  received  from  them,  in  addition  to  the 
very  large  payments  made  by  the  New  York  banks  to  the  Sub- 
Treasury  for  the  account  of  interior  banks. 
.  During  the  same  period  in  the  year  1901 — which  was 
another  time  of  great  demand  for  money — the  shipments  of 
currency  by  the  New  York  banks  to  the  interior  banks  ex- 
ceeded by  $18,500,000  the  shipments  received  from  the  in- 
terior banks,  and  this  also  was  in  addition  to  large  transfers 
of  cash  to  the  interior  banks  through  the  Sub-Treasury. 

The  fact  is  that  in  all  times  of  urgent  demand  for  money 
the  high  rates  for  call  money  in  New  York  draw  money  from 
abroad,  and  more  money  goes  to  the  interior  from  New  York 
than  comes  from  the  interior  to  New  York,  through  currency 
shipments  and  transfers  at  tlie  Sub-Treasury  to  meet  the 
demands  of  the  country  at  large  ;  and  there  is  therefore  no 
basis  for  the  assumption  of  the  Pujo  report  of  the  diversion 
of  funds  needed  for  crop  moving  and  other  legitimate  pur- 
poses to  speculation  on  the  stock  market  and  of  the  with- 
drawal from  productive  industry  of  large  amounts  of  capital. 
To  this  we  need  only  add  that  the  use  of  capital  or  bank 
funds  in  connection  with  speculation  is  just  as  legitimate  as 
the  other  uses  to  which  they  are  put,  because,  as  has  been 
shown  to  this  Committee  by  ample  authority  of  the  highest 
kind,  which  has  not  been  disputed  by  any  one,  speculation  is 
necessary  and  essential  to  the  development  of  the  industries 
of  the  country  and  its  commercial  expansion. 


50 

VI. 

The  Bill. 

If  we  have  succeeded  in  establishing,  as  we  believe  we 
have,  in  the  foregoing  sub-divisions  of  this  brief,  that  there  is 
no  volume  of  transactions  on  the  Exchange,  subject  to  con- 
demnation as  fraudulent  or  improper,  it  follows  that  there 
is  no  occasion  for  legislation  under  the  power  of  Congress 
to  regulate  the  mails,  and  this  brief  might  stop  here.  But 
because  it  is  claimed  that  there  has  been  manipulation 
or  so-called  unwholesome  speculation  to  some  extent,  we 
propose,  under  this  head,  to  examine  the  bill  as  a  remedial 
measure  with  reference  to  its  purpose,  operation  and  prac- 
ticability. 

The  bill  is  entitled  "  A  bill  to  prevent  the  use  of  the  mails 
and  of  the  telegraph  and  telephone  in  furtherance  of  fraudulent 
and  harmful  transactions  on  stock  exchanges."  Thus,  according 
to  its  title,  its  object  is  limited  to  excluding  **  fraudulent  and 
harmful  transactions  on  stock  exchanges "  from  the  mails, 
telegraph  and  telephone.     It  consists  of  five  sections. 

Section  1  provides  that  no  letter,  package,  circular, 
pamphlet,  post-card  or  newspaper  containing  any  informa- 
tion or  quotations  of  prices  concerning  transactions  in  secur- 
ities on  any  stock  exchange,  nor  any  papers  of  any  kind  re- 
lating to  such  transactions,  shall  be  deposited  in  the  mails, 
unless  the  exchange  is  incorporated  and  its  charter  or  by-laws 
embody  the  requirements  and  prohibitions  therein  prescribed. 
Section  2  confers  power  upon  the  Postmaster  General  to  ex- 
clude from  the  mails,  any  letter,  package,  circular,  pamphlet, 
post-card  or  newspaper  containing  information  or  quotations  of 
prices  respecting  transactions  in  securities  on  an  exchange 
which  shall  not  "upon  evidence  satisfactory  to  him,"  have 
conformed  to  the  requirements  specified  in  Section  1  or  which 
shall  "  have  failed  to  enforce  "  such   requirements.     Section  3 


81 

provides  that  any  person  who  shall  knowingly  deposit  in  the 
mails  any  letter,  package,  circular,  pamphlet,  post-card  or 
newspaper  in  violation  of  Section  1  shall  be  deemed  guilty  of 
a  misdemeanor,  and  on  conviction  shall  be  fined  $1,000  or  im- 
prisoned not  more  than  two  years,  or  both,  for  the  first 
ofi'ense,  and  not  more  than  five  years  for  any  subsequent 
offense.  Section  4  provides  that  if  any  telegraph  or  tele- 
phone company  shall  knowingly  transmit  any  order,  quota- 
tions of  prices  or  other  information  concerning  transactions 
in  securities  on  exchanges  which  shall  not  have  conformed  to 
the  requirements  specified  in  Section  1  or  that  shall  have 
failed  to  conform  to  any  order  issued  by  the  Postmaster 
General  pursuant  to  Section  2,  shall  be  guilty  of  a  misdemeanor. 
Section  5  defines  various  terms  used  in  the  bill,  such  as 
"  stock  exchange,"  "  securities,"  "  manipulation  of  securities," 
"  matched  orders,"  and  "  washed  sales." 

An  analysis  of  Section  1  shows  that  the  requirements  im- 
posed upon  the  exchanges,  in  addition  to  incorporation,  may 
be  grouped  under  various  heads  according  to  the  purposes 
they  are  designed  to  subserve. 

Paragraphs  1  and  2  of  subdivision  (a)  and  subdivisions  (h) 
and  (i)  are  primarily  regulations  of  corporations,  and  of  the  re- 
lations of  oflScers  and  directors  to  their  corporations,  and  their 
purpose  is  to  accomplish  certain  corporate  regulation  or  re- 
forms through  the  medium  of  stock  exchanges.  Subdivision  (e)^ 
{f)  and  {h)  are  regulations  of  the  relations  of  members  of  an 
exchange  to  their  customers.  Subdivision  {g)  is  a  regulation 
affecting  members  of  an  exchange  as  individuals,  and  sub- 
division (c)  is  a  regulation  of  the  exchange  itself  concerning 
the  removal  of  securities  from  its  list.  Subdivision  (d)  pro- 
hibits the  manipulation  of  securities  and  is  the  only  provision 
directly  relating  to  transactions  on  an  exchange.  We  propose 
to  discuss  these  requirements  according  to  this  grouping  to 
avoid  repetitions. 


52 

(1)  Incorporation. 

This  subject  has  been  so  much  discussed  that  ifc  is  not 
necessary  to  treat  it  in  a  detailed  way.  It  was  before  the 
Legislature  of  the  State  of  New  York  in  the  spring  of  1913, 
and  was  thoroughly  discussed  at  that  time  at  two  hearings, 
one  before  the  Judiciary  Committee  of  the  Senate  and  the 
Codes  Committee  of  the  Assembly  sitting  together,  and  the 
other  before  the  Judiciary  Committee  of  the  Senate  with 
members  of  the  Codes  Committee  of  the  Assembly  present. 
The  arguments  made  on  those  occasions  by  the  counsel  for 
the  New  York  Stock  Exchange  will  be  submitted  to  the  Com- 
mittee with  this  biief.  The  subject  is  discussed  in  the  brief 
of  the  same  counsel  submitted  to  the  Pujo  Committee,  a 
copy  of  which  has  been  made  a  part  of  these  proceedings 
(Exhibit  B,  Appendix).  It  has  been  elaborately  argued 
before  this  Committee,  and  the  argument  on  behalf  of  the 
New  York  Stock  Exchange  is  found  in  the  record  at  pages 
347-363.  The  Judiciary  Committee  of  the  Senate  of  the  Leg- 
islature of  the  State  of  New  York  made  a  report  against  incor- 
poration which  was  sustained  by  the  Senate  by  a  vote  of  34 
to  5.  The  Hughes  Commission  was  adverse  to  incorporation 
as  appears  from  the  following  quotation  from  its  report  : 

"  We  have  been  strongly  urged  to  recommend  that 
the  Exchange  be  incorporated  in  order  to  bring  it 
more  completely  under  the  authority  and  supervision 
of  the  State  and  the  process  of  the  courts.  Under 
existing  conditions,  being  a  voluntary  organization, 
it  has  almost  unlimited  power  over  the  conduct  of 
its  members  and  it  can  subject  them  to  instant 
discipline  for  wrongdoing,  which  it  could  not  ex- 
ercise in  a  summary  manner  if  ifc  were  an  incorpo- 
rated body.  We  think  that  such  power  residing  in 
a  properly  chosen  Committee  is  distinctly  advantageous. 
The  submission  of  such  questions  to  the  courts  would 
involve  delays  and  technical  obstacles  which  would 
impair  discipline  without  securing  any  greater  measure 
of  substantial  justice.  While  this  Committee  is  not 
entirely  in  accord  on  this  point,  no  member  is  yet  pre- 
pared to   advocate  the   incorporation  of  the   Exchange 


53 

and  a  majority  of  us  advise  against  it  upon  the  ground 
that  the  advantages  to  be  gained  by  incorporation  may 
be  accomplished  by  rules  of  the  Exchange  and  by 
statutes  aimed  directly  at  the  evils  which  need  correc- 
tion." 

With  all  this  material  before  the  Committee  it  would  seem 
to  be  suflScient  in  this  place  to  confine  ourselves  to  a  summary 
of  the  points  involved. 

(a)  Incorporation  is  not  necessary  to  regulation. 

We  think  it  was  fairly  demonstrated  on  the  oral  argument 
that  incorporation  is  not  necessary  to  regulation,  either  State 
or  national,  within  constitutional  limitations. 

It  is  said  in  the  Pujo  Eeport  (p.  115)  : 

"  Notwithstanding  these  facts,  it  (the  Exchange) 
contends  that  it  should  be  permitted  to  continue  its 
voluntary  organization  with  the  privileges  and  freedom 
of  action  of  a  private  club  and  should  not  be  made  sub- 
ject to  legislative  or  judicial  control  or  supervision  and 
that  it  is  not  amenable  to  Federal  regulation  in  its  use 
of  the  mails  and  of  the  telegraph  and  telephone  in  inter- 
state commerce  and  in  the  dealings  of  its  members  with 
foreign  countries.  To  this  contention  your  Committee 
is  unable  to  agree.  It  is  incongruous  that  such  an 
institution,  wdelding  such  power  and  equipped  to  per- 
form such  useful  and  important  functions  in  our 
economic  system,  should  be  uncontrolled  by  law." 

This  is  a  gross  exaggeration  of  any  position  ever  taken  by 
the  authorities  of  the  Exchange.  It  has  never  claimed  to  be 
on  the  footing  of  a  private  club.  It  would  be  absurd  to  make 
such  a  claim  in  view  of  the  fact  that  it  is  a  market  place  where 
the  members  deal  with  each  other  on  behalf  of  the  public  as 
well  as  on  their  own  account.  To  speak  of  it  as  "  uncontrolled 
by  law  "  is  equally  absurd,  considering  the  wide  scope  of  the 
legislative  power  with  respect  to  transactions  on  the  Exchange, 
and  the  relations  of  the  Exchange  and  its  members  to  the 
public.  The  bills  enacted  by  the  Legislature  of  the  State  of 
New  York  in  the  Session  of  1913  show  the  exercise  of  that 
power  with   respect   to   manipulation,   false    representations 


54 

concerning  securities,  reporting  or  publishing  fictitious 
transactions,  discriminations  by  exchanges  or  members 
thereof,  transactions  by  brokers  after  insolvency,  hy- 
pothecation of  customers'  securities,  trading  by  brokers 
against  customers'  orders,  and  delivery  of  memoranda  of  trans- 
actions (N.  Y.  Laws  of  1913,  Chapters  253,  475,  476,  477,  500, 
692,  693).  Other  bills  are  pending  before  the  present  session 
of  the  Legislature,  and  the  same  is  true  in  Massachusetts. 
Like  legislation  of  other  States  was  considered  in  Booth  vs. 
Illinois,  184  U.  S.,  425  ;  Otis  vs.  Parker,  187  U.  S.,  606  ;  Gale- 
wood  vs.  North  Carolina,  203  U.  S.,  551 ;  Broadnak  vs.  Missouri, 
219  U.  S.,  285.  This  legislative  power  is  limited  only  by  its 
constitutional  limitations,  and  it  operates  with  equal  force 
upon  the  transactions  of  an  exchange  and  the  relations  of  its 
members  to  the  public  whether  it  is  incorporated  or  a  volun- 
tary association.  If  it  were  ever  deemed  wise  to  place  the 
transactions  on  an  exchange  under  the  direct  supervision  of 
some  public  authority  the  power  to  do  so  would  be  just  the 
same  with  respect  to  an  unincorporated  as  to  an  incorporated 
exchange.  This  is  really  a  self-evident  proposition.  There  is 
therefore  nothing  to  be  gained  in  the  way  of  legal  control 
or  governmental  regulation  and  supervision  by  incorporation ; 
and  that  being  true  the  argument  for  incorporation  falls  to  the 
ground,  because  it  is  founded  on  the  proposition  that  incor- 
poration is  necessary  to  those  ends. 

(h)  Though  nothing  would  be  gained  by  incorporation  it 
would  involve  serious  consequences  of  a  detrimental  char- 
acter. Under  a  legislative  charter  the  terms  of  member- 
ship, and  the  relations  of  the  members  to  the  governing 
body  of  the  Exchange  would  be  subject  to  legislative  con- 
trol, whereas  they  are  now  a  matter  of  contract.  The  pres- 
ent disciplinary  power  of  the  governing  body  is  based  on 
this  contractual  relationship.  Under  the  contract  fixing  the 
terms  of  membership  every  member  agrees  to  observe 
the    rules     of    the    Exchange     and     submits    himself    to 


55 

the  jurisdiction  of  the  Board  of  Governors  to  punish  any 
violation  of  the  rules  by  fine,  suspension  or  expulsion, 
as  the  case  may  be.  The  most  effective  of  these  rules  are 
couched  in  the  broadest  language  to  bring  within  their  sweep, 
not  only  acts  that  are  wrongful  from  a  legal  point  of  view, 
but  acts  that  are  inconsistent  with  fair  dealing  and  in  any 
way  detrimental  to  the  Exchange  as  a  great  market  for  securi- 
ties. Under  this  contract  a  member  charged  with  a  violation 
of  a  rule  is  tried  before  the  Board  of  Governors,  the  selected 
representatives  of  the  whole  membership  of  the  Exchange,  and 
because  of  this  contract  between  the  members  the  courts  will 
not  interfere  with  any  exercise  of  the  punitive  powers  of  the 
Board  if  it  appears  that  the  written  charge  made  against 
the  member  concerns  a  violation  of  some  rule  ;  that  the  mem- 
ber has  been  heard  in  his  defense  ;  that  there  is  evidence  to 
support  the  decision  of  the  Governors  ;  and  that  the  Governors 
have  acted  in  good  faith.  There  are  numerous  cases  to  that 
effect.  If  it  were  permitted  to  a  member  who  has  been 
suspended  or  expelled  to  take  his  case  into  court,  for  a  judicial 
determination  on  the  evidence  of  the  question  whether  he 
should  have  been  punished,  the  delays,  and  the  possible  con- 
flicts between  the  courts,  looking  at  the  matter  from  a  strictly 
legal  point  of  view  and  with  the  legal  habit  of  mind,  and  the 
Governors  looking  at  it  from  the  point  of  view  of  practical  men 
of  great  experience  in  the  actual  transactions  of  the  Exchange, 
would  inevitably  impair  the  eflSciency  of  the  disciplinary 
power  and  debase  the  morale  of  the  Exchange  audits  member- 
ship. This  proposition  would  seem  to  be  fairly  self-evident 
too. 

(c)  Another  objection  to  incorporation  is  that  there  would 
follow  from  it  constant  appeals  to  the  legislature  to  amend  /  vj 
the  charter  of  the  Exchange,  to  correct  imaginary  grievances 
plausibly  presented  and  supported  by  personal  sympathy  in 
case  of  apparent  hardship,  requiring  continual  activity  on  its 
part  in  legislative   matters   to   preserve   the    integrity    and 


56 

standing  of  its  membership.  To-day  its  responsibility  for  the 
conduct  of  its  members  in  the  transaction  of  business  on  the 
exchange  is  unqualified,  and  public  opinion  can  and  does  hold 
it  accountable  for  whatever  takes  place.  Interference  by  the 
State  under  a  legislative  charter  in  the  province  of  the  rela- 
tions of  the  members  to  each  other  and  to  the  governing  body 
of  the  Exchange — which  does  not  at  all  touch  the  relation  of 
the  Exchange  or  its  members  to  the  public— will  divide  that 
responsibility  and  fatally  impair  and  weaken  it. 

It  was  these  ari^aments  that  convinced  the  Legislature  of 
the  State  of  New  York  that  it  would  be  unwise  for  it  to  com- 
pel incorporation  ;  and  we  believe  them  to  be  unanswerable. 

(2)  The  group  of  regulations  of  which  corporate  regulation 
is  the  purpose. 

Paragraphs  1  and  2  of  subdivision  (a),  subdivision  (h)  and 
subdivision  (i)  of  Section  1  require  corporations  having  secu- 
rities listed  on  an  exchange  to  file  with  the  Secretary  of  the 
Exchange  (1)  a  sworn  statement  of  the  nature,  amount  and  value 
of  the  tangible  and  other  property,  assets  and  effects  of  the 
corporation,  its  actual  and  contingent  liabilities  and  obliga- 
tions, the  volume  of  its  business  and  net  earnings  year  by 
year  for  at  least  three  years  ;  and  a  like  statement  with  respect 
to  every  subsidiary  or  controlled  corporation  in  which  it  is 
interested  ;  and  (2)  a  copy  of  every  contract  in  writing,  and  a 
description  of  every  parol  contract,  affecting  the  authoriza- 
tion, issue,  sale  or  disposition  of  its  securities 
listed  on  the  Exchange,  accompanied  by  a  full  disclosure  of 
all  fees,  profits,  charges,  commissions  or  compensation  paid  or 
agreed  to  be  paid  or  reserved  to  bankers,  brokers,  middlemen 
or  others  in  connection  therewith,  and  of  the  net  amount 
realized  or  to  be  realized  therefor. 

Subd.  (h)  requires  every  such  corporation  to  file  at  least 
once  in  each  year  with  the  Postmaster-General  and  the  Secre- 
tary of  the  Exchange  a  detailed  statement  of  its  gross  receipts 


57 

and  expenses,  and  its  net  earnings  ;  and  a  particular  statement 
of  any  and  all  agreements  between  it  and  any  of  its  oflScers  or 
directors,  or  witli  any  partnership,  association  or  corpora- 
tion in  which  any  oflScer  or  director  is  interested,  and  of 
the  profits,  emoluments,  salaries,  commissions  or  other 
compensation  or  benefits  to  accrue  therefrom  to  such  officers 
or  directors  or  any  partnership,  association  or  corporation  in 
which  such  officer  or  director  is  interested. 

Subdivision  (2)  provides  that  every  such  corporation  shall  be 
required  to  amend  its  charter  or  by-laws  to  expressly  pro- 
hibit sales  and  purchases  of  its  stock  or  securities  by  its  offi- 
cers and  directors  unless  they  give  previous  written  notice  of 
such  intended  action  to  the  directors  for  entry  upon  the  min- 
utes of  the  meeting  of  the  board,  and  unless  such  transactions  are 
reported  to  the  secretary  of  the  company  within  five  days 
after  they  are  made  that  they  may  be  entered  upon  the  min- 
utes of  the  next  succeeding  meeting  of  the  board. 

Some  of  these  requirements  are  no  doubt  proper  and  de- 
sirable but  they  should  be  provided  for  in  legislation  directly 
operating  upon  the  corporation.  They  are  measures  of  regula- 
tion framed  under  the  theory  that  the  Stock  Exchange  should 
be  made  an  agency  of  corporate  regulation  to  correct  the  short 
comings  of  State  legislation.  That  does 'not  seem  to  us  to  be 
the  province  of  an  exchange,  and  no  stock  exchange  anywhere 
in  the  world  that  we  know  is  utilized  by  the  State  to  perform 
such  a  function.  It  appears  from  the  Pujo  report  that  this 
is  the  avowed  purpose  of  these  provisions  of  the  bill.  Can  it 
be  seriously  argued  that  legislation  with  that  avowed  purpose 
is  authorized  under  the  power  of  Congress  to  regulate  the 
mails  ?  If  Congress  has  any  power  to  legislate  with  respect  to 
the  inventories  and  statements  that  corporations  must  make ; 
the  disclosure  they  must  make  respecting  their  issues 
of  securities,  and  the  profits  and  commissions  payable  in  con- 
nection therewith ;  the  disclosure  they  must  make  of  con- 
tracts in  which  their  officers  and   directors  are  directly  or  in- 


58 

directly  interested  ;  and  the  dealings  of  officers  and  directors 
in  the  securities  of  their  corporations,  it  must  be  under  the 
power  to  regulate  such  corporations  because  engaged  in  inter- 
state commerce ;  and  it  would  naturally  be  legislation  directly 
operating  upon  corporations  of  that  character.  To  attempt  to 
legislate  on  those  subjects  under  the  power  to  regulate  the  use 
of  the  mails  is  incongruous  to  the  last  degree. 

Another  fatal  objection  to  these  provisions  is  that  they 
have  no  direct  relation  to  the  use  of  the  mails,  and  are  not 
germane  to  a  bill  to  prevent  the  use  of  the  mails  "  in  further- 
ance of  fraudulent  and  harmful  transactions  on  stock  exchanges." 
There  is  no  such  relation  between  these  requirements  and  the 
character  of  the  transactions  on  an  exchange  as  to  warrant 
legislation  with  respect  to  them  under  the  power  to  regulate 
the  mails.  If  there  is  any  relation  at  all  between  them  it  is 
altogether  too  remote  as  a  pretext  for  such  legislation  under 
that  power. 

Another  objection,  of  a  practical  rather  than  a  legal  nature, 
is  that  the  Exchange  has  no  power  to  enforce  these  requirements. 
/AH  it  could  do  would  be  to  strike  the  securities  of  a  non-com- 
^  plying  corporation  from  the  list  so  that  there  could  be  no  deal- 
ings in  them  on  the  Exchange.  The  result  of  that  course  would 
be  to  transfer  the  dealings  to  the  unregulated  markets  outside, 
because  there  are  such  markets  in  which  dealings  in  securities 
now  take  place  to  a  large  extent ;  and  the  quotations  of  prices 
that  would   then  go   through   the  mails  would  emanate  from 
news  gatherers.     If  there   are   to   be   such  requirements  they 
should  be  compulsory;   and  they   can   only   be   compulsory 
when  they  are  imposed  by  legislation  directly  operating  upon 
the  corporations  themselves. 
y  No  criticism  has  been  heard  of  the  listing  requirements  of 

the  Exchange.  They  are  very  elaborate,  and  there  has  to  be 
strict  compliance  with  them,  passed  upon  and  approved  by  a 
Committee  composed  of  experts,  subject  to  ratification  by  the 
Board   of   Governors.     The  Pujo  report  says  (p.  115)  that  the 


59 

Exchange  "  undertakes  to  prescribe  the  form  and  conditions 
of  every  corporate  security  in  which  it  authorizes  dealings  and 
its  determination  is  final  through,  its  control  over  the  listing  of 
such  securities.  It  reserves  the  right  to  exact  minutest  de- 
tails of  the  affairs  of  the  issuing  corporation,  to  impose 
its  will  in  the  matter  of  the  procedure  by  which  such 
corporation  shall  declare  and  pay  interest  and  dividends, 
and  in  the  matter  of  the  transfer  agents  and  registrar, 
and  as  regards  endless  other  details,"  and  adds  that  it 
is  very  proper  for  it  to  do  so.  No  evil  existing  in  the  method 
of  listing  securities  on  the  Exchange,  legislation  regarding  it 
would  scarcely  seem  to  be  necessary  even  if  the  power  to  legis- 
late existed. 

(3)  The  group  of  regulations  affecting  the  relations  of 
members  of  an  exchange  to  their  customers. 

Subd.  (e)  requires  the  prohibition  of  the  hypothecating  by 
a  member  of  any  security  belonging  to  his  customer  for  any 
amount  in  excess  of  the  sum  at  the  time  owing  such  member 
thereon,  and  of  any  arrangement  or  agreement  with  his  cus- 
tomer for  such  use.  Subd.  (/*)  requires  the  prohibition  of  the 
lending  of  the  securities  of  a  customer  pledged  with  a  member, 
and  of  the  making  of  any  agreement  with  his  cus- 
tomer with  respect  thereto.  Subd.  (h)  requires  that  no 
order  of  a  customer  to  purchase  securities  shall  be  executed 
unless  the  member  shall  have  received  from  the  customer  a 
partial  payment  in  cash  of  not  less  than  twenty  per  cent,  of 
the  market  price  of  the  security  on  the  day  of  purchase. 

The  avowed  purpose  of  these  requirements  is  to  restrain 
speculation.  They  raise  the  question  whether  Congress  has 
the  power  to  regulate  the  relations  between  a  member  of  an 
exchange  and  his  customer ;  and  whether  the  limitation  of  the 
right  of  individuals  to  contract  with  each  other  with  respect 
to  the  hypothecation  of  securities,  the  lending  of  securities  and 
the  amount  for  which   credit  may  be  extended  by  one  to   the 


60 

other  is  not  a  violation  of  tlie  Fifth  Amendment  of  the  Con- 
stitution. Hypothecation,  lending  securities  and  extending 
credit  are  matters  subject  to  the  law  of  the  State  where  they 
occur.  There  is  for  instance  a  law  of  the  State  of  New  York 
which  regulates  the  hypothecation  of  a  customer  s  securities 
which  impliedly  recognizes  that  the  securities  may  be  used  by 
a  broker  with  the  consent  of  the  customer  in  a  manner  pro- 
hibited by  this  bill.  Surely  the  law  of  the  State  is  the  para- 
mount law  on  those  subjects  ;  and  as  Congress  may  not  di- 
rectly legislate  with  regard  to  them,  it  is  clear  that  it  may  not 
do  so  indirectly  by  imposing  a  requirement  upon  stock  ex- 
changes, which  in  turn  it  can  only  indirectly  reach  through 
the  power  to  regulate  the  use  of  the  mails. 

Passing  the  legal  aspects  of  these  particular  requirements, 
there  is  the  grave  question  whether  it  is  wise  to  endeavor  to 
restrain  speculation  by  legislation.  We  do  not  propose  to  go 
into  that  question,  because  it  was  so  thoroughly  covered  on 
the  hearings  before  this  Committee.  The  legislation  of  Ger- 
many in  1896  warns  us  that  legislative  interference  with  specu- 
lation on  stock  exchanges  is  fraught  with  danger,  and  apt  to 
produce  just  the  opposite  to  the  intended  effects  ;  and  con- 
firmatory of  that  experience  is  the  experience  of  Congress 
in  enacting  the  law  of  1864  against  speculation  in  gold  which 
had  to  be  repealed  after  it  had  been  in  force  just  fifteen 
days. 

But  these  requirements  would  serve  no  useful  purpose  in 
any  event.  If  the  course  of  a  stream  is  dammed  it  will  overflow 
the  surrounding  country  or  find  another  channel.  Orders  could 
be  executed  on  the  Exchange  by  floor  brokers  for  non-member 
brokers,  followed  by  transactions  off  the  Exchange  between 
the  latter  and  their  customers.  The  present  course  of  business 
relating  to  the  hypothecation  of  securities,  the  lending  of 
securities  and  the  amount  of  the  margin  is  supported  by  long 
established  practice,  and  is  necessary  to  the  carrying  on  of 
the  business  ;  and   it  can  be  continued  even  if  prohibited   by 


61 

the  rules  of   the   Exchange  by  membership  of    the   Exchange 
being  confined  to  floor  brokers  as  it  would  be. 

(4)  The  requirements  bearing  on  the  Exchange  itself  and 
its  membership. 

(a)  Subd.  (g)  provides  that  the  members  of  the  Exchange 
shall  be  required  to  keep  full  and  accurate  books  of  account 
of  all  their  Exchange  transactions,  containing  all  the  actual 
names  and  transactions  of  their  customers  and  the  serial  number 
of  all  securities  or  certificates  that  have  been  purchased  or 
sold  by  them  ;  and  that  such  books  and  all  the  records  of  the 
members  shall  be  at  all  times  open  to  the  inspection  of  the 
Postmaster  General  and  such  persons  as  he  may  from  time  to 
time  designate  to  make  such  examinations. 

The  unconstitutionality  of  this  provision  was  sufficiently 
presented  on  the  oral  argument  made  on  behalf  of  the  Ex- 
change (R.,  pp.  374-378). 

We  suppose  that  its  main  purpose  is  to  enable  the  Post- 
master General  through  a  corps  of  special  agents  to  ascertain 
from  the  books  and  papers  of  members  whether  or  not  there 
are  grounds  for  the  exercise  of  the  arbitrary  power  conferred 
upon  him  by  Section  2  of  the  bill.  But  the  investing  of  the 
Postmaster  General  with  such  a  power  is  no  sufficient  reason 
for  the  invasion  of  the  privacy  of  the  individual  books  of  the 
members  of  the  Exchange  containing  their  transactions  with 
their  customers.  If  the  power  cannot  be  effectively  exercised 
without  the  invasion  of  that  privacy  ifc  may  be  a  good  reason 
for  not  conferring  ifc ;  but  it  is  no  reason  for  such  a  wholesale 
sacrifice  of  individual  rights  or  such  wholesale  publicity  of  the 
private  affairs  of  the  public. 

The  grave  practical  objection  to  this  requirement  is  that  it 
would  drive  the  public  to  the  offices  of  non-members  and 
cause  substantially  every  responsible  house  to  retire  from  the 
Exchange.  The  Exchange  would  become  nothing  more  than  a 
body  of  floor  brokers  executing  orders  for  non-member  houses 
and   receiving   payment  in  cash.     The  business   now  done  on 


62 

the  Exchange  would,  without  regulation,  be  carried  on  through 
non-member  houses,  the  names  of  which  alone  would  appear 
upon  the  books  of  the  floor  broker  ;  and  the  names  of  those 
houses  would  be  of  no  service  to  the  Postmaster  General  because 
their  books  would  not  be  accessible  to  public  examination.  The 
extent  to  which  these  non-member  houses  would  continue  to 
avail  themselves  through  the  floor  brokers  of  the  facilities  of 
the  Exchange  is  even  doubtful.  Those  facilities  would  be 
so  greatly  curtailed  that  direct  dealings  between  houses 
would  to  a  large  extent,  and  probably  to  an  ever  increasing 
extent,  take  the  place  of  the  present  open  trading  on  the  floor 
of  the  Exchange.  As  the  provisions  of  subdivisions  (a),  (b) 
and  (i)  would  probably  cause  the  removal  from  the  Exchange 
of  many  of  the  securities  now  listed  there  because  of  non-com- 
pliance with  them  by  many  corporations  ;  and  the  provisions 
of  subdivisions  (e),  (  /*)  and  (A)  would  take  many  transactions 
off  the  Exchange  because  an  obstruction  to  the  natural  and 
necessary  course  of  business  ;  and  this  subdivision  (g)  would 
remove  the  bulk  of  the  present  membership  from  the  Exchange 
through  the  exposure  of  their  private  books  containing  their 
transactions  with  their  customers,  the  probabilities  are  that 
the  Exchange  would  cease  to  be  a  market  of  any  importance 
whatever.  The  effect  of  the  bill  would,  therefore,  be  to  seri- 
ously impair  the  institution  as  to  which  the  Pujo  report  says 
(p.  lU) : 

"The   stock  exchanges  in  our  principal  cities,  and 
especially  those  in   New  York,  Chicago,  Pittsburg   and 
n/  Boston,  are  essential  instrumentalities  in  the  conduct  of 

modern  business  and  finance." 

(h)  Subd.  (c)  prohibits  the  striking  of  a  security  from  the 
list  so  long  as  any  part  of  the  issue  originally  listed  is  out- 
standing, except  after  due  notice  to  all  security  holders 
affected  by  the  proposed  action,  and  subject  to  review  by  any 
court  of  competent  jurisdiction. 


63 

It  should  be  enough  to  say  of  this  provision  that  by  no 
ingenuity  can  any  connection  be  traced  between  striking  a 
security  from  the  list  and  the  transmission  of  quotations  through 
the  mails.  The  effect  of  striking  a  security  from  the  list  is  to 
prevent  all  dealings  in  it  on  the  Exchange,  and  therefore  there 
can  be  no  quotations  of  any  kind  respecting  it  on  the  Exchange. 
But  passing  this  obvious  objection,  the  provision  is  certainly  in 
strange  contrast  with  other  provisions  of  the  bill  because  the 
removal  of  securities  from  the  list  is  only  done  when  in  the 
opinion  of  the  Exchange  it  is  necessary  to  prevent  fraud  or 
manipulation. 

During  the  Pujo  investigation  the  Exchange,  at  the  request 
of  the  counsel  for  the  Committee,  furnished  to  the  Committee 
a  complete  list  of  all  the  securities  which  over  a  long  period 
of  years  had  been  removed  from  the  list.  The  reasons  for  the 
removal  were  shown  in  each  instance,  and  in  every  case  in 
which  it  was  called  upon  to  do  so  the  Exchange  furnished  the 
documents  upon  which  its  action  was  founded.  Counsel  did 
not  put  this  statement  in  evidence  before  the  Committee. 
Out  of  all  the  removals  only  two  were  brought  to  the  attention 
of  that  Committee  or  adversely  commented  upon  before 
this  Committee.  "We  feel  that  Mr.  Pomroy's  explanation  of 
both  of  those  cases  must  have  satisfied  the  Committee  that 
the  action  of  the  Exchange  was  proper.  (See  also  the  re- 
marks of  counsel  for  the  New  York  Stock  Exchange  on  this 
subject,  K,  pp.  371-372). 

(5)  Regulations  affecting  transactions  on  the  Exchange. 

Subd.  {d)  prescribes  that  the  manipulations  of  securities 
and  of  the  prices  and  transactions  therein,  and  all  fictitious 
purchases  and  sales  of  securities,  and  what  are  known  as 
"  matched  orders  "  and  "  washed  sales,"  and  all  other  deal- 
ings or  transactions  that  are  intended,  or  the  effect  of  which 
is,  to  deceive  or  mislead  the  public  shall  be  prohibited  by 
regulations  of  the  Exchange  to  be  approved  by  the  Post- 
master  General.     In    connection  with   this    subdivision    there 


64 

has  to  be  taken  subdivisions  3  and  4  of  Section  5  which  define 
"  manipulations,"  "  matched  orders  "  and  "  washed  sales." 

These  are  the  only  provisions  of  the  bill  that  have  any 
relation  at  all  to  transactions  on  the  Exchange  with  respect  to 
which  the  mails,  telegraph  and  telephone  may  be  used.  It 
stands  alone  in  a  sort  of  solitary  pertinency  to  the  subject- 
matter  of  the  bill.  If  a  bill  were  drawn  to  prohibit  the  trans- 
mission of  quotations  emanating  from  manipulated  trans- 
actions through  the  mails  or  by  telegraph  or  telephone  it 
would  be  proper  to  define  what  manipulated  transactions  were. 
As  an  eflfort  in  that  direction  these  provisions  of  the  bill  are  so 
extreme  as  to  be  impracticable. 

Nothing  need  be  said  regarding  these  provisions  in  so  far  as 
they  relate  to  fictitious  transactions,  "  matched  orders  "  and 
"  washed  sales  "  because  they  have  been  prohibited  for  fifty 
years  and  are  unknown  on  the  floor  of  the  Exchange.  The 
definition  of  "  manipulation  "  is  covered  by  two  subdivisions 
(3  and  4  of  Sec.  5).  Sub.  3  defines  it  as  actual  sales  or  pur- 
chases of  securities  by  an  individual  alone  or  in  combination 
with  others  for  the  purpose  of  creating  a  false  or  misleading 
appearance  of  activity,  or  artificially  depressing  or  inflating  the 
market  price  of  a  security,  or  attracting  public  attention  to  the 
security  to  induce  its  purchase  or  sale  by  others.  Hence  an 
actual  purchase  of  stocks,  received  into  the  possession  of  the 
buyer  and  paid  for,  may  be  denounced  as  manipulation  if  the 
Postmaster  General  or  the  Board  of  Governors  or  some  other 
authority,  penetrating  the  mental  operations  of  the  party,  dis- 
covers, or  thinks  there  is  evidence  of  one  of  the  condemned 
purposes.  This  is  true  whether  the  transactions  are  those  of  a 
single  individual  or  a  group  of  men.  This  may  be  an  interest- 
ing view  of  the  matter  as  a  psychological  problem,  but  from  a 
business  point  of  view  it  is  utterly  impracticable.  Motive, 
purpose  and  intent  may,  of  course,  be  inferred  from  the  acta  of 
parties.  But  when  those  acts  aro  consummated  transactions 
consisting  of   the  sale  or  purchase  cf  securities,  nnd  t!ie  buyer 


65 

or  seller  insists  that  he  bought  or  sold  them  because  he  desired 
to  own  them  in  the  one  case  or  to  own  them  no  longer  in  the 
other,  how  is  it  practical  for  the  Postmaster  General  or  the 
Board  of  Governors  to  impute  some  hidden  improper  motive 
or  purpose  to  the  transactions.  The  legitimacy  of  business 
on  an  exchange  cannot  be  made  to  depend  upon  such  con- 
siderations if  there  is  to  be  that  free  movement  of  transac- 
tions which  is  the  essence  of  its  usefulness  as  a  market. 

By  the  other  definition  (subd.  4,  §  5)  manipulation  con- 
sists in  giving  or  causing  to  be  given,  or  knowingly  executing 
or  causing  to  be  executed,  upon  any  exchange,  directly  or 
indirectly,  any  order  for  the  simultaneous,  or  substantially 
simultaneous,  purchase  or  sale  of  any  security  by  or  for  or  on 
behalf  of  the  same  persons  or  interests,  whether  accom- 
plished by  means  of  genuine  or  fictitious  purchases  or 
sales.  This  comes  nearer  to  a  proper  definition  of 
manipulation  because  it  involves  simultaneous  orders  to  buy 
and  sell  for  the  same  man  or  group  of  men  ;  but  it  is  too 
broad  because  it  covers  transactions  of  that  character  which 
are  perfectly  legitimate.  We  refer  to  what  we  have  said  in 
the  discussion  of  manipulation  under  Point  III.  of  this  brief, 
and  insist  that  the  definition  there  given,  and  the  definition 
which  is  involved  in  the  prohibitions  of  the  rule  of  the  Ex- 
change adopted  February  5,  1913,  and  the  Act  of  the 
Legislature  of  the  State  of  New  York  (Laws  of  1913,  Ch. 
253)  are  the  only  practical  definitions  because  they  avoid 
the  trammeling  of  legitimate  and  proper  transactions  and 
the  unnecessary  curtailment  of  the  function  and  usefulness 
of  the  Exchange  as  a  market.  We  reiterate  that  there  is  no 
existing  manipulation,  or  existing  evils  due  to  manipulation, 
to  call  for  or  warrant  any  legislation  on  the  subject. 

(6)  The  only  remaining  provision  of  the  bill  to  which  we 
deem  it  necessary  to  refer  is  Section  2,  conferring  upon  the 
Postmaster  General   the   extraordinary  power  of  closing  the 


66 

mails  to  any  letter,  newspaper  or  other  written  or  printed 
statements,  containing  reports  or  quotations  of  prices  concern- 
ing stock  exchange  transactions  if,  upon  evidence  satisfactory 
to  himself  obtained  as  he  sees  fit,  he  shall  conclude  that  the 
exchange  has  failed  to  enforce  the  requirements  prescribed 
by  the  bill.  A  more  far-reaching  power  of  an  arbitrary  nature 
could  not  be  conferred  upon  a  public  oflScial.  We  do  not 
care  who  that  official  is,  or  how  high  he  may  be  in  the 
hierarchy  of  the  public  service,  it  is  hostile  to  the 
principles  of  a  free  government.  To  quote  the  language  of 
Mr.  Justice  Bkadley  in  the  case  of  Boyd  against  the  United 
States,  116  U.  S.,  632, — "  It  may  suit  the  purposes  of  despotic 
power  ;  but  it  cannot  abide  the  pure  atmosphere  of  political 
liberty  and  personal  freedom."  That  is  all  we  care  to  say  on 
this  subject. 

We  feel  that  this  survey  and  analysis  of  the  bill  warrant 
the  conclusion  that  many  of  its  provisions  are  not  regulations 
of  the  mails,  telegraph  or  telephone  at  all,  and  that  as  a 
whole  it  would  be  an  impracticable  and  harmful  measure. 


Conclusion. 

There  are  some  matters  concerning  the  Exchange  briefly 
treated  in  the  Pujo  Eeport  which  we  should  like  to  dis- 
cuss that  the  case  of  the  Exchange  might  be  fairly  pre- 
sented ;  but  they  are  not  germane  to  this  bill,  and  we 
do  not  therefore  feel  warranted  in  doing  so.  We  have 
strictly  confined  our  attention  to  the  bill  and  the  ques- 
tions it  raises,  and  have  gone  into  them  somewhat  fully 
because  they  radically  affect  the  vitals  of  the  Exchange.  1/ 
this  bill  were  to  become  law  or  any  bill  drawn  along  the  same 


67 

general  lines  there  can  be  no  doubt  that  the  effect  upon  the 
Exchange  would  be  revolutionary,  both  with  regard  to  the 
character  of  its  membership  and  its  scope  as  a  market.  The 
tendency  of  one  set  of  restrictions  would  be  to  eliminate  in  the 
main  from  its  membership  the  brokerage  houses  that  serve  the 
public ;  and  the  tendency  of  another  set  would  be  to  curtail 
the  scope  of  the  market  through  closing  its  list  to  many  future 
issues  of  securities  and  the  probable  elimination  of  many 
now  on  the  list.  These  are  serious  considerations  which 
may  not  be  ignored  in  framing  any  legislation  affecting  the 
Exchange,  which  is  a  delicate  piece  of  mechanism  that  can 
oasily  be  thrown  out  of  gear.  It  is  "  an  essential  instrumen- 
tality in  the  conduct  of  modern  business  and  finance  "  ;  and 
to  derange  it  is  to  derange  business  and  finance  to  a  degree 
and  in  ways  beyond  the  anticipation  of  any  man.  It  is  the 
scene  of  vast  transactions  which  are  carried  out  under  its 
rules  with  an  extraordinary  absence  of  friction,  obstruction 
and  loss.  It  was  never  more  alert  than  it  is  now  to  conform 
its  operations  to  the  highest  principles  of  conduct ;  and  to 
protect  and  safeguard  the  public  interests.  There  is  no  occa- 
sion, in  our  judgment,  for  any  legislation  affecting  its  organi- 
zation, rules  or  methods ;  and  to  throw  it  into  confusion  will 
be  an  irremedial  public  injury.  That  inevitable  consequence 
we  have  tried  to  make  clear,  actuated  only  by  a  sense  of  duty, 

John  G.  Milburn, 
Walter  F.  Taylor, 
Of  Counsel  for  the  New  York  Stock  Exchange. 


BEFORE  THE 

Committee  on  Banking  and  Currency 

OF  THE  UNITED  STATES  SENATE. 


IN  THE  MATTER  OF  SENATE  BILL  No.  3895. 


REPLYING  BRIEF  ON  BEHALF  OF  THE 
NEW^  YORK  STOCK  EXCHANGE. 


n 


BEFORE  THE 
COMMITTEE  ON    BANKING    AND  CURRENCY 

OF  THE  UNITED  STATES  SENATE. 


IN  THE  MATTER  OF  SENATE  BILL  NO.  3895. 


REPLYING    BRIEF    ON    BEHALF    OF    THE 
NEW  YORK  STOCK  EXCHANGE. 

At  the  close  of  the  hearing  before  the  Committee  on  the 
12th  day  of  February,  1914,  it  was  understood  that  briefs 
could  be  submitted.  Subsequently  the  time  fixed  for  their 
filing  "was  March  4th ;  and  on  that  day  our,  main  brief  was  sent 
to  Washington,  followed  the  next  day  by  a  memorandum 
on  the  constitutionality  of  the  bill  and  another  on  the 
New  York  Bank  Note  Company  matter.  The  final  print  of 
Mr.  Untermyer's  brief  came  into  my  hands  on  the  24th 
day  of  March,  1914.  In  the  mean  time  he  had  appeared 
before  the  Committee  and  made  an  additional  argument 
(Record,  pp.  457-520).  As  the  argument  made  by  him 
on  March  10,  and  his  brief  fill  more  than  100  pages 
of  the  Eecord  it  is  impossible  to  compress  this  reply 
into  a  few  pages  as  I  had  hoped.  But  I  shall  endeavor 
to  confine  it  within  reasonable  limits,  though  to  do  so 
will  involve  passing  over  many  matters  which  invite  discus- 
sion and  correction.    The  truth  is  that  there  is  little  in  either 


argument  or  brief   in   the  way  of   statement  of   fact  or   argu- 
ment that  is  unassailable. 

One  general  observation  I  cannot  refrain  from  making  at 
the  outset.  I  protest  against  the  vituperation  of  the  Exchange 
and  its  members  that  runs  all  through  the  brief.  It  is  full  of 
such  phrases  as  "  the  illegitimate  transactions  that  now  dis- 
grace it "  (the  Exchange) ;  "  the  dissemination  of  frauds  "  ;  "  to 
protect  the  public  against  being  victimized  " ;  "  protect  the 
honesty  of  the  public  market  against  the  frauds  that  now 
characterize  it  "  ;  "  foisted  upon  the  public  "  ;  "  confidence 
game  "  ;  **  blind  pools  "  ;  "  hundreds  of  millions  that  had  been 
annually  taken  from  the  public  and  dishonestly  taken " ; 
"  tortuous  attitude " ;  "  pirating  on  the  high  seas " ; 
"  filched  from  the  public " ;  "  incredibly  deplorable  state 
of  affairs " ;  "  abuses  that  were  being  perpetrated  upon 
the  community "  ;  "  deception  of  the  public "  ;  "  misrep- 
resenting the  issues  and  misleading  the  public"; 
"juggled'*;  "fraud  and  pillage";  "cards  that  have  been 
stacked  against  you  "  ;  "  fraudulent  and  fictitious  transac- 
tions by  which  the  public  has  been  grossly  swindled  on  an 
enormous  scale  "  ;  "  prey  upon  the  country  "  ;  "  the  scandals 
of  all  the  past  years  in  its  management " ;  "  the  same  old 
game  "  ;  "  another  raid  "  ;  "  flagrantly  dishonest  practice  "  ; 
"  worst  form  of  gambling  "  ;  "  carnival  of  exploitation " ; 
long  continued  license  ".  All  this  is  mere  abuse  to  create 
popular  prejudice,  because  such  a  mode  of  treating  an  im- 
portant subject  and  one  of  the  oldest  institutions  in  the 
country  could  scarcely  have  been  expected  to  influence  men  of 
the  character,  experience  and  intellectual  power  that  compose 
this  Committee.  It  is  not  the  phraseology  of  sincerity ; 
nor  of  candid  and  dispassionate  analysis  or  criticism ; 
nor  is  it  entitled  to  any  persuasive  power.  On  the  con- 
trary it  reveals  a  passionate,  vindictive  and  personal 
antagonism.  Though  so  much  abuse  is  poured  on  the  Ex- 
change   it    is    asserted  at    the   end   of    the  brief    that  the 


73 

author  has  not  intended  in  anything  he  has  said  "  to  reflect 
upon  the  integrity  of  the  memher ship  of  the  New  York  Stock 
Exchange  taken  in  its  entirety  "  (R.,  p.  651).  But  the  Exchange 
is  indistinguishable  from  its  members  ;  its  acts  are  their  acts ; 
its  offenses  are  their  offenses ;  and  its  management  is  com- 
posed of  their  representatives  selected  bj  the  membership  in 
its  entirety.  To  say  that  the  vituperation  of  the  Exchange  is 
not  intended  to  reflect  on  the  integrity  of  the  membership  as 
an  entirety  is  to  confess  that  it  is  a  sham. 


The  function  of  the  Postmaster  General. 

Mr.  Untermyer,  in  his  argument  of  March  10th,  said  that 
the  bill  imposes  upon  the  Postmaster  General  two  duties,  the 
first  of  which  is  that  he  shall  "  examine  the  charter  and  by- 
laws of  every  incorporated  stock  exchange  whose  quotations 
are  sent  through  the  mails."     He  added  : 

"  If  the  Postmaster  General,  upon  looking  at  that 
charter,  finds  those  regulations  in  it,  that  is  the  end  of 
his  duty.  It  is  not  for  him  to  determine  whether  or  not 
the  Exchange  is' obeying  or  whether  it  is  violating  the 
provisions  of  that  charter.  That  manifestly  is  nothing 
but  a  plain  ministerial  duty  "  (R.,  p.  458). 

He  then  proceeds  : 

"  The  second  duty  and  right  of  the  Postmaster  Gen- 
eral is  to  examine  the  books  of  the  members  for  the 
purpose  of  determining  whether  or  not  any  member  is 
engaged  in  manipulating  the  quotations  that  are  being 
carried  through  the  mails.  If  he  finds  there  has  been 
manipulation  he  has  no  further  duty  with  reference  to 
it.  He  cannot  even  cancel  the  charter  ;  he  cannot  then 
deny  the  use  of  the  mails  to  the  Exchange.  All  he  can 
do  is  to  get  the  information  and  pass  it  along  to  where 
it  belongs— to  the  Department  of  Justice  "  (R.,  p.  458), 


That  is  contrary  to  the  view  I  had  expressed,  which  was 
that  "  if  the  Postmaster  General  shall  as  the  result  of  an 
investigation  conducted  in  his  own  way  decide  that 
the  Exchange,  although  it  has  incorporated  and  adopted  this 
medley  of  requirements,  is  not  enforcing  those  reqidrementSy 
he  may  issue  an  order  suspending  the  transmission  through 
the  mails  of  any  letter,  package,  circular,  pamphlet,  post-card 
or  newspaper  containing  an  order  or  statement  or  quotation  of 
prices,  or  any  advices,  report  or  information  concerning  trans- 
actions in  securities  on  the  Exchange"  (K.,  p.  377).  Mr. 
Untermyer  has  evidently,  since  his  argument,  given  Section  2 
of  the  bill  more  careful  study,  because  in  his  brief  he  changes 
his  position  and  admits  that  the  Postmaster  General  is  em- 
powered to  determine  whether  the  Exchange  is  enforcing  the 
statutory  requirements  (E..,  p.  610).  But  he  still  insists  that 
the  act  of  the  Postmaster-General  in  this  regard  is  purely 
ministerial ;  and  that  if  as  a  result  of  the  examination  of  the 
books  of  the  members  of  the  Exchange  he  finds  fictitious  and 
manipulated  transactions  he  cannot  stop  the  transmission 
of  the  quotations  through  the  mails,  or  interfere  with 
the  operations  of  the  Exchange,  or  do  more  than  "furnish 
the  evidence  thus  secured  as  a  basis  for  prosecuting 
the  guilty  parties " ;  and  further,  that  "  the  Exchange  is 
not  thereby  interfered  with  in  its  right  to  continue  the 
use  of  the  mails  for  its  quotations "  (R.,  p.  610).  This  is 
just  as  unfounded  as  his  first  position.  By  Section  2  the 
Postmaster  General  is  empowered,  in  the  event  of  his  determine 
ing,  upon  evidence  satisfactory  to  himself,  that  an  exchange 
has  failed  to  enforce  the  requirements  of  the  bill  which  it 
has  adopted  in  conformity  with  the  bill,  to  prohibit  the  use 
of  the  mails.  There  is  nothing  ministerial  in  the  nature  ox 
character  of  that  act  or  determination.  It  is  a  discretionary 
act  of  the  widest  latitude.  The  Postmaster  General  may  send 
his  special  agents  to  examine  the  books  of  members,  and  treat 
their  reports  as  sufficient  evidence  that  the  statutory  require- 


76 

ttients  have  nofc  been  enforced  by  the  Exchange,  and 
thereupon  arbitrarily  close  the  mails  to  all  letters  and 
newpapers  referring  to  transactions  or  quotations  on  the 
Exchange.  The  effect  of  such  action  on  his  part  is 
to  shut  the  Exchange  up,  to  stop  the  circulation  of  news- 
papers through  the  mails  if  they  publish  the  quotations  of 
the  premier  security  market  in  the  country,  and  to  demoralize 
a  vital  branch  of  the  financial  business  of  the  country.  That 
I  have  characterized  as  a  "  tremendous  power  "  ;  and  though 
Mr.  XJntermyer  belittles  it  as  purely  "  ministerial ",  he 
seems  to  appreciate  its  real  character,  without  admitting  it, 
by  suggesting  an  amendment  on  his  argument  that  the  Ex- 
change should  be  entitled  to  a  hearing  (E.,  p.  459),  and  in  his 
brief  that  there  should  be  a  judicial  review  of  the  action  of 
the  Postmaster  General  (R.,  p.  610).  The  only  tenable  posi- 
tion is  that  it  is  not  a  power  that  should  be  conferred  upon 
any  official. 


XL 

The  Pogition  of  tlie  Exchange  Respecting;  Federal 

Regnlation. 

Mr.  Untermyer  says  that  the  discussion  before  your  Com- 
mittee has  forced  "  the  virtual  admission  by  the  opponents 
of  this  bill  of  the  necessity  for  some  sort  of  a  Federal 
regulation";  that  counsel  for  the  Exchange  has 
suggested  that  a  bill  similar  to  the  bill  respecting 
lottery  tickets  would  answer  the  purpose ;  that  the  sug- 
gestion of  the  "  substitution  of  the  Secretary  of  Commerce 
or  the  Commissioner  of  Corporations  for  the  Postmaster 
General  is  not  explained  except  by  the  fact  that  the  Exchange 
IS  seeking  to  take  advantage  of  a  prejudice  against  delegating 


76 

any  additional  powers  to  the  Postmaster  General "  ;  tliat  the 
position  of  the  Exchange  is  inconsistent  in  that  it  has  **  sub- 
mitted an  elaborate  argument  to  prove  that  the  distribution  of 
quotations  is  not  interstate  commerce  "  and  yet  "  suggests  as  a 
remedy  legislation  on  the  lines  of  the  anti-lottery  bills  "  (E., 
pp.  612,  613).  The  Exchange  has  not  admitted  that  there  is 
any  necessity  for  any  Federal  regulation  of  the  Exchange.  On 
the  contrary  its  position  is  and  has  been  all  through  not  only 
that  there  is  no  occasion  for  such  regulation,  but  that  it  is  not 
subject  to  Federal  regulation.  All  that  its  counsel  said  was 
that  the  only  bill  that  would  be  a  legitimate  exercise  of  the 
power  to  regulate  the  use  of  the  mails  with  respect  to  the 
transmission  of  manipulated  transactions  or  quotations  would 
be  a  bill  based  on  the  lottery  ticket  legislation  as  a 
precedent  (E.,  pp.  345,  882).  He  did  not  propose  such  a 
bill  on  behalf  of  the  Exchange  as  necessary  to  reach  any  ex- 
isting conditions ;  nor  would  such  a  bill  be  a  regulation  of 
the  Exchange  in  any  sense. 

The  Exchange  approves,  and  always  has  approved,  any 
legislation.  State  or  National,  regulating  the  issue  of  secur- 
ities by  corporations,  and  requiring  publicity  as  to  promotion 
profits  or  any  other  corporate  operations  or  transactions 
which  affect  the  interests  of  the  public.  National  regulations 
of  that  character  would  necessarily  be  under  the  jurisdiction 
of  the  Interstate  Commerce  Commission  as  to  railroad  cor- 
porations, and  the  Secretary  of  Commerce  or  the  Commis- 
sioner of  Corporations  as  to  industrial  corporations.  That  is 
the  only  connection  in  which  those  authorities  were  men- 
tioned by  anyone  that  I  recall.  No  one  has  suggested  any  dele- 
gation of  power  to  them  in  lieu  of  the  Postmaster  General 
with  respect  to  the  mails  "  to  take  advantage  of  a  prejudice  " 
or  at  all. 

There  is  no  inconsistency  in  the  position  taken  by  the  Ex- 
change. It  has  not  insisted  or  argued  that  the  interstate 
transmission    of    quotations     is    not    interstate     commerce. 


77 

The  Exchange  is  not  in  any  way  engaged  in  such,  transmission. 
It  collects  the  quotations  at  its  own  expense  and  sells 
them  in  the  City  of  New  York  to  the  Western  Union  Tele- 
graph Company  which  transmits  them  all  over  the  country. 
Not  being  engaged  in  the  interstate  transmission  of  its  quota- 
tions it  is  immaterial  to  it  whether  that  transmission  is  inter- 
state commerce  or  not.  What  was  argued  on  its  behalf  was 
that  the  transactions  of  purchase  and  sale  on  the  Exchange, 
which  is  the  business  that  is  done  there,  are  not  interstate 
commerce ;  and  for  that  position  there  is  the  explicit  authority 
of  the  United  States  Supreme  Court  (People  ex  rel.  Hatch  vs. 
Reardon,  204  U.  S.,  152).  Hence  those  transactions  are  not 
subject  to  regulation  under  the  commerce  clause  of  the  Con- 
stitution. But  that  position  is  quite  consistent  with  the  posi- 
tion that  it  may  be  within  the  power  of  Congress  to  enact 
legislation  respecting  the  interstate  transmission  of  false  or 
fictitious  quotations  similar  to  the  legislation  respecting  the 
transmission  of  lottery  tickets. 


III. 

Tlie  proposed  bill  of  the  Boston  Chamber  of 
Commerce. 

I  gather  from  the  record  that  the  gentlemen  who  appeared 
before  the  Committee  for  the  Boston  Chamber  of  Commerce 
were  requested  to  embody  in  a  bill  their  idea  as  to  what  would 
be  proper  regulation  and  submit  it  to  the  Committee.  That 
the  Boston  Chamber  of  Commerce  has  done.  I  understand 
that  it  is  a  body  composed  of  representative  merchants  and 
business  men  of  the  City  of  Boston.  It  is  fair  to  assume  that 
they  undertook  to  comply  with  the  request  of  the  Committee 
in  good  faith,  and  that  the  bill  they  submitted  embodies  their 


78 

sincere  convictions.  But  Mr.  Untermyer  loads  it  with  abuse 
and  imputes  to  them  dishonorable  motives.  He  says,  "  It  is 
the  most  transparent '  make-believe '  ",  and  "  a  *  blind '  under 
cover  of  which  to  defeat  eflfective  regulation  "  (K.,  p.  615). 
Thus  a  body  of  gentlemen  of  high  standing  and  position, 
complying  with  a  request  of  this  Committee,  is  publicly 
charged  with  deception,  because  it  would  surely  be  deception 
to  submit  to  you  a  bill  which  was  a  "  make-believe  "  and  a 
"  blind  "  with  the  real  purpose  of  defeating  effective  regu- 
lation. But  that  seems  to  be  Mr.  Untermyer's 
way.  He  describes  the  New  York  legislation  of 
1913  as  a  "blind"  (E.,  pp.  641,  642)  "intended  to 
stand  in  the  way  of  effective  legislation."  Referring  to  the 
rules  enacted  in  February  and  March,  1913,  by  the  Exchange 
to  prevent  manipulation,  ho  says  that  the  Exchange  "  under 
pretense  of  such  rules  is  attempting  to  perpetuate  the  prac- 
tice "  ;  that  he  "  can  plainly  see  what  it  seeks  to  accomplish 
here  by  its  tortuous  attitude  "  ;  and  that  "  it  wants  to  make  it 
appear  here  that  manipulation  is  forbidden  in  order  to  defeat 
legislation  and  still  to  be  able  to  insist  hereafter  when  that 
peril  has  passed  that  what  it  is  doing  is  not  manipulation  but 
something  that  it  has  always  claimed  the  right  to  do"  (Il.,p. 
619).  Thus  whether  it  is  the  Boston  Chamber  of  Commerce 
or  the  New  York  Stock  Exchange  his  method  is  to  impute 
base  motives. 

Begarding  the  bill  proposed  by  the  Boston  Chamber  cf 
Commerce  the  attitude  of  the  New  York  Exchange  is  one  of 
opposition  to  its  provisions  on  the  same  grounds  that  it  has 
urged  with  respect  to  similar  provisions  contained  in  the  bill 
before  the  Committee. 


79 


IV. 

/ Theeacamination  of  the  books  of  membera  of 
the  Hxehange  by  the  Postmaster  General  and 
snch  persons  as  he  may  from  time  to  time  desig- 
nate. 

The  purposes  of  this  provision  of  (lie  bill  are  more  clearly 
revealed  in  Mr.  Untermyer's  brief  than  they  have  been  before. 
Though  the  bill  is  drawn  under  the  postal  clause  of  the  Con- 
stitution, and  it  is  asserted  that  it  "  attempts  nothing  by  indi- 
rection "  (p.  C29),  it  is  now  boldly  asserted  that  "  the  prevention 
and  punishment  of  manipulation  are  the  chief  aims  of  the  hill  " 
(E.,  615).  It  is  in  that  aspect  of  the  bill  as  one  to  prevent  and 
punish  manipulation  that  the  provision  respecting  the  exam- 
ination of  the  books  of  members  of  the  Exchange  is  seen  in 
its  true  light.  The  Postmaster  General  is  to  perform  the 
function  of  a  detective  agency.  He  is  to  provide  himself  with 
a  staff  of  special  agents  to  search  the  books  of  members  of  ex- 
changes for  evidence  of  manipulation  to  be  used  in  criminal 
prosecutions.  It  is  explicitly  said  that  the.Postmaster  General 
is  given  the  power  "  to  examine  the  books  of  the  members 
containing  entries  of  their  transactions  on  the  Exchange  (not 
their  other  business)  as  the  only  possible  means  of  detecting 
such  misuse,  so  that  if  such  violations  exist  they  may  be  dealt 
with  by  the  courts  upon  the  complaint  of  the  Department  of 
Justice  ";  and  further,  that  if  in  his  examination  of  the  books 
of  members  he  finds  that  there  has  been  manipulation  "  all  he 
can  do  in  that  event  is  to  furnish  the  evidence  thus  secured  as 
a  basis  for  prosecuting  the  guilty  parties  "  (R.,  p.  610).  This 
is,  then,  according  to  Mr.  Untermyer,  the  purpose  and  object 
of  this  inquisitorial  provision. 

That  being  the  object  and  purpose  of  the  provision  there 
is  no  doubt  about    its  unconstitutionality.     People  ex  rel. 


80 

Eeardon  vs.  Ferguson,  197  N.  T.,  236,  is  an  explicit  authority 
on  that  point.  But,  disregarding  its  illegality,  it  is  indefensible 
as  a  matter  of  policy,  because  it  is  not  within  the  proper 
province  of  the  Postmaster  General  to  act  as  a  specially  desig- 
nated appendage  of  the  Department  of  Justice  to  gather  evi- 
dence for  its  purposes. 

But  Mr.  Untermyer  insists  over  and  over  again  that  the 
provision  is  a  necessary  one  if  manipulation  is  to  be  detected 
and  punished.  If  that  were  a  valid  argument  there  is  scarcely 
any  limit  to  its  scope,  because  it  would  apply  to  every  offense 
the  most  accessible  evidence  of  which  is  to  be  found 
in  the  books  and  papers  of  individuals.  I  do  not 
think  that  even  the  most  radical  opponent  of  private 
rights  and  individual  liberty  is  willing  to  go  to  that  extent. 
Moreover,  such  an  examination  is  not  necessary  to  the  de- 
tection and  punishment  of  manipulation.  Manipulation  is 
to-day  a  penal  offense,  and  legislation  may  redefine  and 
extend  it  from  time  to  time.  Transactions  on  the  Exchange 
take  place  under  the  eyes  of  men  and  have  an  unusual  pub- 
licity. If  the  offence  be  committed  the  District  Attorney, 
with  the  aid  of  a  Grand  Jury,  will  have  no  difficulty  in  getting 
proof  to  obtain  a  conviction  without  resorting  to  the  books 
and  papers  of  the  accused  party  or  parties.  It  is  idle  to  say 
that  they  cannot  reach  offenses  unless  they  have  access  to  the 
books  of  the  accused  party. 

This  is  one  of  the  most  indefensible  provisions  of  the  bill, 
and  if  enacted  could  only  have  baleful  consequences  (R.,  pp. 
376,  377,  561,  562). 


81 


V. 


The  "  Publicity  Bepartment "  of  the  Ex- 
change. 

Mr.  Untermyer  says  in  lils  brief  (K.,  p.  634)  : 

"  The  Exchange  maintains  a  publicity  department 
under  the  euphonious  title  of  the  •  Library  Committee.* 
In  the  course  of  the  hearings  before  your  Committee 
there  was  distributed  from  Washington  and  published 
all  over  the  country  a  canard  to  the  effect  that  the 
President  had  expressed  his  disapproval  of  the  Bill 
now  under  discussion.  So  persistent  and  circumstan- 
tial was  the  rumor  that  an  explicit  denial  from  the 
White  House  was  considered  advisable  to  prevent  the 
discrediting  of  the  legislation. 

**  Such  methods  are  most  unfortunate.  They  are 
bound  sooner  or  later  to  react  against  the  Exchange 
and  thus  obscure  the  merits  of  the  controversy,  which 
the  champions  of  this  measure  are  anxious  to  have  tm- 
pariially  and  impersonally  discussed"     (Italics  ours). 

The  only  construction  of  which  this  statement  is  suscep- 
tible is  that  the  Exchange  through  its  Library  Committee  in- 
vented and  circulated  a  canard  misrepresenting  the  position  of 
the  President. 

Mr.  Untermyer  made  this  same  statement  in  the  brief 
which  he  left  with  the  Committee  on  February  5th^  1914  (K., 
p.  97). 

Mr.  Yan  Antwerp,  in  his  address  to  the  Committee,  said 
respecting  it : 

**  I  am  a  member  of  the  Library  Committee  of  the 
New  York  Stock  Exchange  referred  to.  No  member  of 
that  Committee  directly  or  indirectly  (nor  anyone  acting 
for  them  or  representing  them)  at  any  time  has  caused 
to  be  circulated  in  any  way,  shape  or  form  such  a 
canard  or  rumor  as  the  one  here  described"  (B., 
p.  112). 


82 
After  a  colloquy  with  Mr.  Untermyer  he  further  said : 

*•  I  should  like,  in  view  of  the  statement  I  have  just 
made  to  you,  Mr.  Chairman,  to  ask  Mr.  Untermyer  to 
withdraw  from  the  record  the  paragraph  under  discus- 
sion "  (K.,  p.  113). 

Then  this  followed  (K.,  pp.  113-114) : 

"  Mr.  Untermyer  :  I  should  first  like  to  make  this 
statement :  The  fact  is,  is  it  not,  that  a  circumstantial 
account  did  appear  in  the  newspapers  all  over  the 
country  shortly  prior  to  the  day  fixed  for  this  hearing 
to  the  effect  that  the  President  disapproved  of  this  leg- 
islation ?  I  happened  to  reach  Washington  the  morn- 
ing that  it  appeared  in  the  papers  and  saw  it  in  the 
papers.  I  did  not  believe  it  was  true  so  I  called 
up  the  White  House,  as  I  felt  it  would  have 
an  injurious  effect  and  would  prejudge  this 
legislation.  The  statement  was  corrected  from 
the  White  House.  It  was  stated  the  President  had  not 
said  any  such  thing  or  intended  that  any  such  thing 
should  be  said.  What  he  had  said  was  that  only  those 
measures  were  strictly  administration  measures  which 
were  specifically  mentioned  in  the  platform,  such  as 
interlocking  directors,  holding  companies,  and  that  the 
Stock  Exchange  measure  had  not  been  specially  men- 
tioned in  the  platform  and  therefore  it  was  not  an 
administration  measure;  but  he  had  not  expressed 
nor  implied  any  disapproval  of  the  matter.  Then  I 
learned  that  Mr.  Yan  Antwerp,  whom  I  knew  had  been 
concerned  in  the  publicity  end  of  the  Stock  Exchange 
business,  had  reached  Washington  that  afternoon,  and 
I  also  learned  from  some  newspaper  men — or  at  least 
I  was  told  he  had  seen  some  newspaper  men  or  they 
had  seen  him — I  knew  Mr.  Yan  Antwerp  had  been  very 
active  in  the  library  department  of  the  Stock  Exchange 
for  quite  a  long  time.  I  do  not  mean  to  say  im- 
properly active.  I  do  not  imply  anything  of  the  kind. 
But  he  had  been  before  he  became  a  Governor  of  the 
Exchange,  which  was  very  recently,  quite  active  in  the 
publicity  department  of  the  Exchange.  That  is  the 
only  basis  I  had  for  the  statement,  and  in  view  of  Mr. 
Yan  Antwerp's  statement  now  made  I  would  like  to 
withdraw  it,  except  to  the  extent  which  I  have  stated." 

The  repetition  of  the  statement  in  the  brief  recently  filed  is 
under  these   circumstances  inexcusable.     Any  newspaper  cor- 


83 

respondent  in  Washington  can  inform  the  Committee  of  the 
circumstances  concerning  the  publication  of  this  so-called 
canard,  and  he  will  confirm  that  the  Exchange  had  nothing 
whatsoever  to  do  with  it. 

Every  allusion  in  the  brief  to  the  Library  Committee  of  the 
Exchange,  or  its  so-called  "  Press  Bureau  '*  or  **  Publicity  De- 
partment" is  just  as  baseless.  The  Library  Committee  is 
composed  of  leading  and  representative  members  of  the  Ex- 
change, and  they  are  ready  at  any  time  to  give  an  account  of 
what  they  have  done  to  counteract  the  campaign  of  misrepre- 
sentation aud  abuse  of  the  Exchange  which  Mr.  XJntermyer 
has  conducted  for  the  past  two  years. 


VI. 

The  California  Petrolenm  Company. 

The  history  of  the  California  Petroleum  Company  and  the 
transactions  in  its  stock  on  the  Exchange  is  again  set  forth  in 
Mr.  Untermyer's  brief  (R.,  p.  625),  and  this  is  the  third  time 
it  appears  in  the  Record  (R.,  pp.  16  et  seq.,  92,  93).  After  re- 
peating this  history,  the  brief  proceeds  (R.,  p.  626) : 

"  The  Exchange  insists  that  this  is  a  legitimate 
transaction  because  it  was  resorted  to  for  the  purpose 
of  *  introducing  a  new  security.'  They  say  the  bankers 
had  sold  their  stock  before  this  was  done  and  there  was 
no  profit  for  them  in  this  operation.  The  facts  as 
proven  do  not  sustain  them.  True  the  first  bankers' 
syndicate  had  sold  its  stock.  But  to  whom  ?  To  the 
second  syndicate  of  which  Messrs.  Lewisohn  were  the 
managers  and  the  bankers  were  also  members.  The 
manipulation  was  conducted  by  the  second  syndicate, 
which  bought  163,000  shares  and  sold  172,900  shares 
during  the  21  days  of  its  operations.  In  the  same  period 
there  were  362,370  shares  sold  on  the  Exchange  and  an 
equal  number  of  course  purchased.    What  about  the 


84 

dear  public  that  was  *  landed  '  with  the  199,270  shares 
that  were  not  represented  by  the  syndicate  dealings,  at 
prices  ranging  between  $60  and  $72.50  per  share  that 
subsequently  declined  to  $16  and  are  now  selling  at 
$25  ?  " 

It  is  wearisome  to  have  again  to  correct  the  misstatements 
contained  in  this  paragraph.  The  Exchange  has  not  insisted 
that  the  transaction  was  legitimate  because  it  was  resorted 
to  for  the  purpose  of  "  introducing  a  new  security." 
The  transactions  on  the  Exchange  were  not  conducted  by 
the  second  syndicate  because  all  the  stock  of  the  second 
syndicate  had  been  sold  to  individual  investors  before  the 
stock  was  listed  on  the  Exchange.  The  transactions  were 
conducted  by  the  banking  houses  that  had  acquired  the  stock 
and  sold  it  to  the  second  syndicate,  not  for  the  purpose  of  gain 
to  themselves,  nor  for  the  purpose  of  "  introducing  a  new 
security,"  nor  for  the  purpose  of  creating  an  "  artificial  activity  " 
in  the  market,  nor  for  the  purpose  of  marketing  the  stock  owned 
by  the  second  syndicate,  but  to  steady  the  market  by  selling 
orders  on  a  scale  up  and  buying  orders  on  a  scale  down, 
thereby  furnishing  a  real  market,  because  any  man  who 
wished  to  sell  would  find  a  buyer  and  any  man  who 
wished  to  buy  would  find  a  seller.  To  repeat  and  repeat  that 
the  transactions  on  the  Exchange  were  carried  on  to  enable 
the  second  syndicate  to  unload  its  stock  on  the  public  right 
in  the  teeth  of  the  testimony  which  Mr.  Untermyer  himself 
elicited  before  the  Pujo  Committee  is  intolerable.  The  actual 
facts  as  revealed  by  that  testimony  are  fully  set  forth  in  our 
brief,  with  references  to  the  Pujo  Eecord  (R.,  pp.  540-o4:3), 


85 


vn. 

The  Kanaivha  and  Michigan  Railway  Com- 
pany matter. 

In  his  speech  of  March  10th,  Mr.  Untermyer  said,  regarding 
this  raih'oad  : 

"  The  control  had  been  acquired  by  the  Toledo  & 
Ohio,  which  was  in  turn  controlled  by  the  Hocking 
Valley,  a  parallel  and  competing  line.  *  -J*-  *  Prior 
to  its  subjugation  and  while  it  was  an  independent 
property  it  was  successful  and  of  great  promise^  but 
under  this  oppression  it  was  fast  losing  its  value.  I 
acted  for  a  protective  committee  of  stockholders  of 
representative  men  who  decided  to  appeal  to  the  courts 
to  liberate  the  road  from  this  intolerable  and  ruinous 
thralldom.  Some  of  my  clients  had  owned  their  stock 
fifteen  or  twenty  years.  They  had  bought  it  when  it 
was  a  promising  independent  pro'perty  and  'paying  divi- 
dendsy  which  stopped  shortly  after  it  came  under  con- 
trol. *  *  ^  My  clients,  some  of  them,  had  paid 
over  par  for  that  stock  over  twenty  years  ago.  Mr. 
Gould,  I  think,  was  the  name  of  one  of  them,  who  told 
me  at  that  time  that  this  stock  had  cost  him,  with  in- 
terest on  his  investment,  about  $300  a  share  "  (E.,  p. 
472).     (Italics  ours.) 

His  last  revised  statement  is  in  his  brief,  where  it  is  said 
that  "  it  appears  that  the  road  had  at  one  time  been  a  pros- 
perous independent  property,  but  had,  contrary  to  the  anti- 
trust law,  come  under  the  control  of  the  Hocking  Valley,  which 
was  a  parallel  and  competing  line,  where  it  remained  for  many 
years  "  (R.,  p.  648). 

What  are  the  facts  ?  This  is  the  history  of  the  road  as  it 
appears  in  the  Company's  application  to  list  its  stock  on  the 
Exchange,  dated  November  5th,  1890 : 

"  The  River  Division  of  the  Ohio  Central  Railroad 
was  sold  under  foreclosure  October  22nd,  1885.  The 
purchaser  organized  the  Ohio  &   Kanawha  Railroad 


86 

Company  in  Ohio  and  the  Kanawha  &,  Ohio  Railroad 
Company  in  West  Virginia,  and  consolidated  them 
Tinder  the  name  of  the  latter  April  17th,  1886.  The 
Kanawha  &  Ohio  Railroad  went  into  the  hands  of  a 
receiver  February  19th,  1889  ;  was  sold  under  fore- 
closure March  Idth,  1890,  by  a  decree  of  the  Circuit 
Court  of  the  United  States  for  the  Southern  District  of 
Ohio,  Eastern  Division.  Sale  was  duly  confirmed  by 
said  Court  April  7th,  1890,  and  the  property  turned 
over  to  the  purchasers  April  24th,  1890.  The  pur- 
chasers organized  the  Kanawha  &  Michigan  Railway 
Company.'* 

These  purchasers  were  the  old  bond  and  stockholders 
(Poor's  Manual,  1C90,  p.  1000).  In  February,  1891,  the  Rail- 
road was  leased  to  the  Toledo  &  Ohio  Central  (Poor's  Manual, 
1891,  p.  730),  which  bought  a  large  amount  of  the  stock  at  $15 
a  share  and  guaranteed  the  principal  and  interest  of  the  bonds. 

The  statement  that  a  road  which  had  been  foreclosed  late 
in  1885,  and  was  again  in  the  hands  of  a  receiver  early  in 
1889  and  sold  under  foreclosure  in  1890,  was  a  prosperous 
independent  property  prior  to  its  lease  to  the  Toledo  &  Ohio 
Central  in  1891  would  seem  to  require  further  revision. 

A  reference  to  Poor's  Manual  from  1890  to  1910  shows  that 
no  dividends  were  paid  on  its  stock  during  that  period  of 
twenty  years  ;  and  the  history  of  the  road  prior  to  that  time, 
with  its  foreclosures  and  receiverships,  would  indicate  that  no 
dividends  had  been  paid  prior  to  1890. 

The  stock  of  the  Company  was  listed  on  the  Exchange  on 
November  26th,  1890.  The  following  are  the  high  and  low 
prices  of  the  stock  from  1891  to  1907  inclusive,  taken  from  the 
Financial  Chronicle : 


87 

Bigii.  Low. 

1891 16J  10 

1892 _ .._.  14  lOf 

1893 _ HJ  9 

1894.  — 9f  7J 

1895 9f  7i 

1896 __. _  8  6J 

1897 9i  4 

1898 . 8  5} 

1899 15  7} 

1900 25  10 

1901 __ _ _. 40  21 

1902 50i  33| 

1903 47i  25J 

1904 _. 38  22i 

1905.__ 58f  29i 

1906 76  62 

1907.-. 50  30 

It  is  difficult  to  see  from  these  figures  liow  the  stock  of  Mr. 
Gould  or  any  of  the  other  clients  of  Mr.  Untermyer,  acquired 
"  fifteen  or  twenty  years  "  before  1910,  could  have  cost  them, 
with  interest  on  their  investment,  "  about  $300  a  share  "  (K., 
p.  472),  or  "nearly  $300  "  (R.,  p.  476),  or  "  between  $200  and 
$300  "  (E.,  p.  648). 

In  1906  or  thereabouts  a  Committee,  of  which  Mr.  George 
D.  Mackay  was  Chairman,  was  formed  to  protect  the  interests 
of  the  minority  holders  of  the  stock  of  this  Company,  the 
majority  being  then  owned  by  the  Hocking  Valley  Railroad 
Company.  The  stockholders  who  desired  to  be  represented 
by  the  Committee  deposited  their  stock  with  J.  P.  Morgan  & 
Co.  who  issued  to  them  their  certificates  in  lieu  thereof.  On 
March  21st,  1910,  the  Committee  issued  to  the  minority  share- 
holders a  circular  of  which  the  following  is  a  copy  : 


88 


MINORITY  STOCKHOLDERS'  COMMITTEE 

Kanawha  &  Michigan  Railway 

G.  D.  Mackay,  16  Nassau  Street 

Chairman,  New  Yobk  City,  March  21,  1910. 

W.  H.  Goadby, 
I.  L.  Ellwood. 

To  THE  Minority  Shareholders 

OF  the  Kanawha  &  Michigan  Railroad. 

Dear  Serb  : 

The  Hocking  Valley  Railroad  has  been  sold  to  the  Chesapeake 
&  Ohio  Railroad,  and  the  Kanawha  &  Michigan  Railroad  to  the 
Lake  Shore  and  the  Chesapeake  &  Ohio  jointly. 

The  price  paid  was  120  for  Hocking  Valley  stock  and  72  for 
Kanawha  &  Michigan  stock.  Your  Committee  has  been  in  confer- 
ence with  the  purchasers  of  the  Kanawha  &  Michigan  for  a  fort- 
night past  to  effect  a  price  at  which  a  possible  sale  of  the  Minority 
stock  of  the  Kanawha  &  Michigan  Railroad  might  be  made  if  the 
stockholders  desired  and  thus  end  the  friction  which  has  for  four 
years  past  made  a  distressing  situation  for  all  concerned  in  the 
Hocking  Valley  and  Kanawha  and  Michigan  merger. 

On  Saturday  last  the  officials  representing  the  purchasers  made 
an  offer  to  your  Committee  of  $72  per  share  for  a  minimum  of 
30,000  shares  of  the  44,000  Kanawha  &  Michigan  Minority  stock,  the 
eame  price  as  was  paid  to  the  Hocking  Valley  Railroad  for  the  Ma- 
jority stock.  This  price  was  not  as  high  as  your  Committee  endeav- 
ored to  get,  but  we  are  in  duty  bound  to  communicate  the  offer  to 
the  stockholders  that  we  represent.  This  price  will  be  less  1^%  to 
the  Committee  to  repay  them  for  services  and  expenses  during  the 
period  of  four  years  of  the  Minority  Stockholders'  effort  to  establish 
their  claims,  and  the  money  will  be  paid  whenever  the  30,000  mini- 
mum shares  are  authorized  to  be  delivered.  The  alternative  to  this 
offer  is  for  any  dissatisfied  stockholder  to  continue  as  a  minority 
shareholder  and  trust  to  the  future  to  produce  revenues  enough  from 
the  contributions  of  the  new  owners  to  the  business  of  the  Railroad 
which  will  justify  payments  of  the  dividends  desired. 

The  plans  of  the  purchasers  contemplate  improvements  to  cost 
one  and  a  half  million  dollars  in  the  next  two  years.  That  this  will 
drain  the  Kanawha  &  Michigan  surplus  during  that  time  goes  with- 
out saying.  There  is  also  to  be  considered  the  Railway  Bill  in  Con- 
gress that  may  have  a  clause  to  prevent  majority  owners  buying  the 
minority  stock  after  the  Bill  is  signed,  and  there  may  be  a  continua- 
tion of  the  litigation  in  the  State  of  Ohio. 

Your  Committee  will  continue  to  represent  your  interests  so 
long  as  the  stockholders  representing  the  minority  shares  desired. 

Tou  are  requested  to  make  an  immediate  reply  to  this  letter 


89 

giving  authority  to  the  Committee  to  dispose  of  your  shares  and  also 
naming  the  amount  of  shares  held  by  you. 

Very  truly  yours, 

George  D.  Maokat,  Chairman, 

W.  H.  GOADBT, 

I.  L.  Ellwood. 

Under  date  of  May  11th,  1910,  Mr.  Goadby,  one  of  the 
members  of  the  Committee,  wrote  the  following  letter  in 
response  to  a  request  for  information  as  to  the  situation  of 
this  stock  : 

Copy. 

OFFICE  OF  W.  11.  GOADBY  &  CO. 

New  York,  May  11,  1910. 

Mb.  W.  W.  Heaton, 

Chairman  of  the  Committee  on  Stock  List, 

New  York  Stock  Exchange,  New  York. 

Dear  Sir  : 

Referring  to  the  nine  millions  of  Kanawha  &  Michigan  Rail- 
way Stock  listed  on  the  New  York  Stock  Exchange,  I  herewith  sub- 
mit to  you  a  statement  which,  to  my  knowledge  and  belief  is  correct. 
Of  this  issue,  80,492  shares  are  held  in  the  Treasury  of  the  Lake 
Shore  and  Chesapeake  <&  Ohio  Railroads.  Of  this  amount  35,393  of 
J.  P.  Morgan  &  Co.'s  Kanawha  &  Michigan  receipts  were  delivered 
through  them  (J.  P.  M.  &  Co.)  to  the  above  mentioned  parties  by  the 
Committee  of  which  I  am  a  member.  1970  shares  have  been  pledged 
to  us.  2800  shares  are  owned  by  Mr.  John  U.  Brookman.  Mr.  Brook- 
man  is  so  ill  that  his  physician  forbid  business  of  any  kind  being 
submitted  to  him,  and  while  therefore  Mrs.  Brookman  and  Mr. 
Maloney  his  Secretary  were  willing  to  deliver  their  receipts  to  this 
Company,  they  were,  owing  to  Mr.  Brookman's  illness,  unable  to  do 
so. 

We  understand  that  the  Untermyer  Committee  are  the  holders 
of  2100  of  these  receipts.  This  would  make  a  total  of  87362  shares 
accounted  for  out  of  the  90,000  share  issue,  leaving  a  balance,  ap- 
parently, of  2638  shares  outstanding  and  unaccounted  for,  all  of 
which  is  respectfully  submitted. 

Very  truly, 
(signed)  W.  H.  GOADBY, 

Member  of  Com. 
(Enc) 


90 

1?he  statement  annexed  to  the  letter  gave  at  tte  end  the 
following  summary  : 

Amount   of    Kanawha  &  Michigan   stock 

outstanding $9,000,000 

Held  by  L.  S.  &  C.  &  O.  Co. '8.80,492  shares 

Morgan  receipts  pledged  to 

Committee 1,970      " 

Held  by  Mr.  Brookman 2,800 

In  Hands  of  Untermyer  Com- 
mittee  2,100 


(( 


(( 


87,362  shares 
Not  accounted  for 2,638      " 

Minority  stockholders  who  were  dissatisfied  with  the  terms 
offered  in  the  above  circular  organized  a  Protective  Committee 
represented  by  Mr.  Untermyer  as  counsel,  which  is  the  Com- 
mittee referred  to  in  the  above  summary  as  the  "  Untermyer 
Committee."  Litigation  was  begun  by  that  Committee  as 
stated  in  his  brief  (E.,  p.  648). 

This  was  the  situation  when  Mr.  Goadby's  letter  of  May 
11th,  1910,  was  received,  and  on  the  showing  made  by  that 
letter  and  the  accompanying  statement  the  Committee  on 
Stock  List  struck  the  stock  from  the  list.  Mr.  Untermyer 
says  that  "  the  undoubted  purpose  of  that  action  was  to  dis- 
courage the  litigants  by  destroying  the  market  for  their  stock 
and  rendering  it  unavailable  as  collateral "  (K.,  p.  648).  This 
is  unqualifiedly  denied.  It  appears  from  Mr.  Goadby's  letter 
and  statement  that  were  before  the  Committee  on  Stock  List 
that  at  the  time  that  action  was  taken  80,492  of  the  90^000 
shares  were  owned  by  the  Lake  Shore  and  C.  &  O.  Eailroad 
Companies  ;  that  1,970  shares  were  pledged  to  the  Mackay 
Committee ;  that  2,800  shares  were  owned  by  Mr.  John 
Brookman,  who  was  then  too  ill  to  deliver  them ;  and  that 
about  2,100  shares  were  represented  by  Mr.  Untermyer 
This  accounted  for  all  but  2,638  shares  of  the  90,000  shares 
listed.    That  state  of  affairs  justified  the  action  of  the  Com- 


91 

fiQittee  as  it  conclusively  appeared  that  there  was  no  longer 
a  suflScient  amount  of  free  stock  outstanding  in  the  hands  of 
individual  owners  for  trading  in  the  stock  on  the  Exchange 
under  proper  conditions.  The  sole  purpose  of  striking  the 
stock  from  the  list  was  the  customary  precaution  of  the  Ex- 
change to  protect  the  public  and  the  Exchange  from  the 
dangers  incident  to  so  small  an  amount  of  outstanding  stock. 

It  is  singular  that  Mr.  TJntermyer  is  the  only  person  who 
has  made  objection  to  this  prudent  practice  of  the  Exchange 
in  striking  stocks  from  the  list.  It  has  been  done  for  many 
years  ;  a  great  many  securities  have  been  so  stricken  oflf ;  and 
the  practice  has  been  universally  approved.  If  it  was  the 
hardship  that  Mr.  TJntermyer  maintains  ;  if  many  people  had 
been  deprived  of  their  market  and  had  their  loans  on  securities 
so  stricken  from  the  list  called,  the  Exchange  would  cer- 
tainly have  heard  of  it.  So  far  as  the  present  generation  of 
the  oflacials  of  the  Exchange  is  aware  no  such  complaint  has 
ever  been  received  from  any  one  save  Mr.  TJntermyer. 

I  do  not  see  that  there  is  any  relevancy  in  the  results  of  the 
operation  of  the  Eailroad  since  the  Lake  Shore  and  C.  &  O. 
succeeded  to  its  ownership  in  1910  upon  which  Mr.  TJnter- 
myer dwells  (K.,  p.  649).  With  those  great  railroad  systems 
as  feeders  of  traflSc  entirely  new  conditions  came  into  existence, 
which  sufficiently  account  for  its  increased  earning  capacity. 

A  regrettable  mistake  was  made  by  the  clerical  force  of  the 
Exchange  in  the  statement  that  it  furnished  for  the  Pujo  Com- 
mittee showing  that  only  2,100  or  2,200  shares  of  stock  were  \/ 
outstanding  when  the  stock  were  stricken  from  the  list.  At 
the  time  the  statement  was  prepared  for  the  Committee  many 
demands  were  being  made  upon  it  for  statements  concerning 
many  different  matters,  and  the  clerical  force  of  the  Exchange 
was  overworked  in  preparing  them.  The  clerk  who  had  the 
matter  in  charge  evidently  furnished,  through  some  misunder- 


92 

standing  or  inadvertence,  the  amount  at  that  time  in  the 
hands  of  the  so-called  "  Untermyer  Committee  "  as  shown 
by  the  statement  annexed  to  Mr.  Goad  by 's  letter. 


vni. 

Fluctuations  in  the  stock  of  the  Reading 
Company  from  September,  1906,  to  November, 
1907. 

In  his  argument  on  March  10th,  Mr.  Untermyer  endeavored 
to  show  manipulation  from  the  price  fluctuations  of  the  Read- 
ing stock  (R.,  pp.  487,  488,  489),  stating  that  "  in  1906 
and  1907,  the  years  in  which  there  were  6,533,000 
shares  dealt  in,  the  stock  reached  the  high  point 
of  156  ; "  that  within  the  next  year  it  dropped 
to  90 ;  that  in  September,  1906,  it  reached  156f  and  in  No- 
vember, 1907,  fell  to  90 ;  and  that  the  other  active  stocks 
on  the  Exchange  did  not  during  that  time  fluctuate  to  "  that 
extent  or  anything  like  that  "  (R.,  p.  489). 

The  fact  is  that  there  were  several  active  stocks  on  the 
list  which  fluctuated  as  much  or  more.  For  instance  between 
the  high  points  of  1906  and  the  low  of  1907,  Union  Pacific 
ranged  from  195f  to  100,  a  fluctuation  of  95f  points  ;  Cana- 
dian Pacific  from  201J-  to  138,  a  fluctuation  of  63^  points  ;  New 
York  Central  from  156 J  to  89,  a  fluctuation  of  67J  points ; 
Brooklyn  Rapid  Transit  from  94 J  to  26f,  a  fluctuation  of  67f 
points ;  and  Missouri  Pacific  from  106f  to  44^,  a  range  of  62f 
points.  The  fluctuations  in  all  these  and  other  cases  were  due 
to  the  fact  that  1906  was  a  year  of  great  expansion  and 
activity  and  1907  the  year  of  a  severe  panic. 


93 

IX. 

Amalgamated  Copper  Company. 

Mr.  Untermyer  brought  forward  for  the  first  time  in  his 
argument  on  March  10th,  the  history  of  the  Amalgamated 
Copper  Company  as  **  probably  the  most  striking  illustration 
of  manipulation  in  the  history  of  the  Exchange "  (R,  pp. 
507-511 ;  see  also  Brief,  R,  pp.  620,  621).  This  belated  in- 
troduction of  that  Company  in  connection  with  manipulation 
prevents  any  adequate  treatment  of  the  subject  in  this  reply. 
He  gives  a  history  of  the  Company,  its  capitalization 
and  increases  of  capital  and  the  incidents  connected  there- 
with, and  the  marketing  of  the  stock  increases  by  various 
individuals,  which  I  have  not  the  time  to  verify  to  distinguish 
what  is  fact  from  what  is  mere  assertion.  He  winds  up  with 
,  the  statement  that  an  elaborate  scheme  of  manipulation  was 
'accomplished  in  1906  and  1907  through  certain  operations  of 
j  the  United  Metals  Selling  Company  in  first  holding  back  the 
sale  of  copper,  thereby  laising  the  price  of  copper  and  of  the 
stocks  of  copper  companies,  and  then  later  flooding  the  market 
with  copper  so  as  to  depress  its  price  and  correspondingly 
the  price  of  copper  company  stocks,  including  those  of  the 
Amalgamated  Company  (K.,  508-510).  The  Exchange  has  no 
information  on  this  subject  of  which  I  can  avail  myself ;  but 
the  testimony  of  Mr.  Wolfson,  the  Yice-President  of  the  United 
Metals  Selling  Company,  given  before  the  Pujo  Committee 
does  not  seem  to  bear  out  Mr.  Untermyer's  charge.  To  be 
able  to  speak  more  definitely  Mr.  Wolfson  has  been  asked  for 
his  comments  on  this  charge. and  this  is  his  reply. 

Comments  on  Mr.  Untermyer's  Statement  Before  the 
Senate  Committee. 

Mr.  Untermyer  advances  the  theory  that  there  was  a  desire  on 
the  part  of  somebody  to  "boost"  the  stock  market  by  means  of 
holding  back  the  sale  of  copper.     He  says  :  "  Then  a  plan  was  de- 


9^ 

Tised  by  those  gentlemen  to  hold  back  production  through  the  sell- 
ing company ;  instead  of  selling  it  normally,  to  hold  back  the  copper 
and  lend  upon  it  to  the  owners  of  the  mines,  thus  creating  a  scarcity 
of  copper,  so  that  copper  went  up  from  about  13  to  about  25  cents 
per  pound."  He  then  begins  to  prove  it  by  means  of  figures  fur- 
nished before  the  Pujo  Investigating  Committee. 

Mr.  Untermyer  would  have  us  believe  that  the  price  was  ad- 
vanced from  13  cents  to  25  cents  during  the  years  1906  and  1907.  As 
a  matter  of  fact,  copper  sold  at  13  cents  in  October,  1904,  and  had  a 
steady  rise  from  that  time  until  on  January  1,  1906,  it  was  selliog  at 
18^  cents  per  pound,  and,  as  everybody  knows,  that  year  was  the 
year  of  the  greatest  expansion  this  country  has  ever  witnessed  and 
prices  of  all  commodities  rose  quite  naturally. 

Now,  let  us  see  how  Mr.  Untermyer  proves  that  copper  was 
held  back.  He  tells  you  that  in  July  15,000,000  pounds  of  copper 
were  sold  at  around  18  cents.  In  August  copper  was  held  back  by 
our  selling  83,000,000  pounds  at  over  18  cents  (this  is  equal  to  about 
three  months'  production).  In  September  copper  was  held  back  by 
selling  about  42,000,000  pounds  at  19  cents  or  over  a  month's  pro- 
duction. He  tells  you  that  in  November,  when  the  price  rose  to  22 
cents,  we  held  our  copper  back  by  selling  over  40,000,000  pounds. 
It  seems  to  me  that  to  carry  out  Mr.  Untermyer's  idea  we  should 
have  at  those  prices  sold  very  little  copper  and  waited  until  it  was 
25  cents  to  unload.  The  fact,  however,  as  shown  by  these  sales,  is 
that  we  attempted  to  stem  the  tide  of  rising  prices  by  offering  copper 
as  freely  as  the  market  would  take  it ;  and  we  deviated  from  our 
usual  custom  of  only  selling  three  months  in  advance  by  selling 
copper  five  and  six  months  in  advance.  However,  even  these  figures 
that  Mr.  Untermyer  quotes  are  not  correct,  as  he  only  gives  you  the 
figures  of  part  of  our  sales.  The  sales  as  shown  hy  the  statement 
presented  to  the  Pujo  Committee  were  as  follows  : 

May,  1906      63,000,000  pounds  @  about  18.63c. 


June, 

(( 

23,000,000 

'        @ 

18.60 

July, 

(( 

20,000,000 

'        @ 

18.52 

August, 

<( 

103,000,000       ' 

'        @ 

18.55 

September, 

li 

59,000,000       ' 

'        @ 

19.17 

October, 

<( 

42,000,000        * 

'        @ 

20.85 

November, 

(i 

52,000,000        ' 

'        @ 

22.05 

December, 

(( 

52,000,000        * 

'        @ 

23.03 

January, 

1907 

17,000,000 

'        @ 

24.27 

February, 

n 

29,000,000 

*        @ 

25.03 

March, 

it 

17,000,000        "       @ 

25.48 

11  Months. 

477,000,000  pou 

nds. 

Mr.  Untermyer  only  gives  the  figures  of  the  sales  of  electrolytic 
copper,  which  comprises  the  major  portion  of  our  sales. 

In  my  testimony  I  told  Mr.  Untermyer  that  the  average  pro- 
duction of  our  companies  was  between  30,000,000  and  40,000,000 
pounds  a  month;    say  an  average  of  35,000,000  pounds,  which 


95 

would  give  the  total  for  that  period  of  385,000,000  pounds,  and, 
according  to  Mr.  Untermyer,  we  attempted  to  hold  back  sales  of 
copper  by  selling  477,000,000  pounds,  or  90,000,000  pounds  more 
than  our  companies  produced  in  the  period. 

Mr.  Untermyer  further  makes  the  point  that  after  March,  be- 
tween the  months  of  March,  1907,  and  October,  1907,  there  was  very 
little  copper  sold.  He  attempts  to  prove  by  that  that  the  copper  was 
held  back  for  some  nefarious  reason.  He  omits,  however,  to  state 
the  conditions  that  existed  then.  On  the  14th  of  March  there  was 
a  violent  panic  in  Wall  Street,  and  buying  of  all  kinds  stopped. 
The  condition  of  the  United  Metals  Selling  Company  at  that  time 
was  that  not  only  had  we  no  stock  on  hand,  but  we  had  commit- 
ments for  delivery  of  copper  that  carried  us  way  into  June  and  July. 
Our  unfilled  contracts  on  the  1st  of  April  were  96,000,000  pounds  of 
copper,  all  at  prices  ranging  from  20  to  25  cents.  The  whole  indus- 
trial and  financial  world  after  that  date  stood  aghast,  and  there  was 
no  demand  for  copper  or  any  other  commodity  (See  my  testimony 
on  that  point  on  pages  731-3). 

Mr.  Untermyer  fails  to  point  out  that  if  we  had  attempted  to 
force  the  sales  of  copper  on  unwilling  buyers  we  would  have,  in  the 
course  of  a  few  weeks,  tumbled  the  market  down  to  perhaps  13  cents 
per  pound,  and  the  people  who  had  contracts  with  us  to  take  nearly 
100,000,000  pounds  of  copper,  would  have  stood  to  lose  about  $10,- 
000,000,  and  as  we  guaranteed  the  contracts  to  the  mining  companies 
we  not  only  would  have  bankrupted  many  of  our  customers,  but  also 
the  United  Metals  Selling  Co.  Besides,  there  was  no  occasion  to  do 
it  as  the  mining  companies  we  represented  had  sold  their  production 
for  the  next  four  months  and  could  very  comfortably  sit  still  and 
deliver  the  copper  that  they  had  sold.  After  that  was  done,  the 
United  Metals  Selling  Company  attempted  to  find  a  market,  first  at 
one  level,  then  at  another,  until  finally,  in  October,  1907,  when  all 
the  metal  that  had  been  sold  earlier  in  the  year  had  been  consumed, 
the  buyers  were  encouraged  to  go  into  the  market  again  at  about  13 
cents  per  pound.  The  wisdom  of  this  was  proven  by  the  fact  that, 
although  the  country  passed  through  the  most  violent  panic  and 
unsettled  conditions  in  its  history,  there  were  no  failures  among  the 
copper  consumers  (See  my  testimony,  pages  Nos.  737  and  738). 

Mr.  Untermyer  further  makes  the  statement  as  follows  ;  **  They 
were  simply  selling  agents,  and  the  record  shows  that  they  were 
loaning  on  40,000,000  pounds  month  by  month  to  the  mining  com- 
panies on  that  copper  in  order  to  hold  it  back  from  the  market."  I 
defy  Mr.  Untermyer  to  prove  that  from  the  record.  The  record 
merely  shows  how  much  money  was  paid  to  the  mining  companies, 
but  that  was  merely  money  paid  to  the  mining  companies  out  of 
cash  collected  for  their  account.  In  my  testimony  on  page  No.  728 
Mr.  Untermyer  asks  :  **  In  April,  May,  June  and  July,  in  these  four 
months  alone  you  advanced  over  $42  000,000,  did  you  not  ?  "  My 
answer  to  that  was  :  "  That  we  paid  out  that  much  money."  Then 
Mr.  Untermyer  says  :  '*  During  those  four  months  you  were  not 
selling  copper,  were  you  ?  "    M7  answer  to  that  waa  that  we  were 


96 

not  making  any  new  contracts,  but  were  delivering.  Mr.  Unter- 
myer  evidently,  in  all  his  question,  seemed  to  think  that  selling 
copper  was  like  selling  stock  certificates,  that  the  next  day  you  de- 
livered the  copper  and  got  your  money,  so  that  I  had  to  explain  to 
him  that  the  copper  was  sold  for  future  delivery  and  the  money  kept 
coming  in  all  the  time. 

One  of  the  statements  required  by  Mr.  Untermyer  before  the 
Pujo  Committee  was  to  show  the  amount  of  money  the  United 
Metals  Selling  Company  borrowed  during  1907.  A  statement  was 
made  up,  which  Mr.  Untermyer  declined  to  spread  on  the  record, 
but  is  referred  to  in  my  testimony  on  page  No.  739.  This  statement 
completely  disproves  Mr.  Untermyer's  contention  that  money  was 
being  borrowed  by  the  mining  companies  against  copper  and  held 
back  from  the  market  for  some  ulterior  motive.  The  statement 
shows  that  borrowing  did  not  begin  until  September,  1907,  and  the 
total  borrowings  of  the  United  Metals  Selling  Company  to  the  end  of 
the  year  were  only  about  $10,000,000,  and  that  on  a  business  of  over 
$100,000,000  for  the  year  1907.  This  covered  a  period  of  great 
financial  stringency  and  the  money  was  needed  to  keep  mines  and 
smelters  in  operation  and  not  throw  all  the  labor  out  of  employment. 
Any  impartial  person  examining  the  record  could  not  but  draw  a 
conclusion  opposite  to  Mr.  Untermyer. 

Resume. 

When  copper  was  around  18  cents,  and  showed  a  tendency  to 
rise,  the  United  Metals  Selling  Company,  representing  the  largest 
producers  in  the  United  States  and  Mexico,  did  all  it  possibly  could, 
by  selling  as  much  copper  as  the  people  would  take,  to  stem  the 
rise,  and  then  when  the  panic  broke  it  did  all  it  possibly  could  to 
prevent  utter  disaster  among  the  customers  who  had  bought  our 
copper  for  future  delivery.  Further,  that  neither  the  mining  com- 
panies nor  the  United  Metals  Selling  Company  were  borrowers  of 
money  in  order  to  keep  up  the  price  of  copper  ;  that  there  was  no 
necessity  for  borrowing  money  until  the  Fall  of  1907,  when  condi- 
tions were  so  bad  that  it  became  necessary  to  curtail  production  at 
the  mines,  and  the  total  amount  of  money  borrowed  was  less  than 
10  per  cent,  of  the  year's  business. 

This  statement  of  Mr.  Wolf  son's  demonstrates  that  Mr. 
Untermyer's  charge  that  the  Amalgamated  Copper  Company's 
stock  was  manipulated  in  1906  and  1907  through  the  operg,- 
tions  of  the  United  Metals  Selling  Company  is  utterly  baseless. 


97 

XI. 

Manipulation. 

Mr.  Untermyer's  tirade  against  tlie  Exchange  is  based  on 
his  assertion  (1)  that  manipulation  is  and  always  has  been 
rampant  on  the  Exchange  ;  and  (2)  that  in  the  view  of  the  Ex- 
change there  is  no  manipulation  if  the  brokers'  commissions 
are  paid,  and  that  it  treats  and  defends  manipulation  as  legiti- 
mate. These  are  pure  assertions,  without  any  support  in  the 
facts,  or  anything  whatsoever  to  sustain  them  either  in  the 
testimony  and  evidence  submitted  to  the  Pujo  Committee  or 
the  information  presented  to  this  Committee. 

(1)  Mr.  Untermyer  mainly  relied  on  three  instances  to 
establish  manipulation  before  the  Pujo  Committee.  They 
were  the  Columbus  &  Hocking  Coal  &  Iron  Pool,  the  Eock 
Island  episode  of  December  27th,  1909,  and  the  California 
Petroleum  Company  matter.  It  is  true  that  he  called  them 
"  typical "  ;  but  that  is  a  mere  subterfuge.  The  presumption 
is  that  with  all  his  industry  and  information  they  were  the 
only  concrete  transactions  he  could  bring  forward.  Realizing 
that  the  case  he  sought  to  make  by  those  instances  had  been 
destroyed  by  a  correct  version  of  them  he  now  shifts  his  posi- 
tion. He  says  that  the  Pujo  Committee  presented  "  on  the 
subject  of  the  manipulation  of  prices  "  a  dozen  or  more  cases 
(E.,  p.  623),  "  some  of  them  extending  over  a  series  of  years  "  ; 
and  that  they  "indicate  that  manipulation  is  the  rule 
rather  than  the  exception  "  (E.,  p.  628).  When  he 
says  this,  he  is  referring  to  the  tables  and  charts 
prepared  for  that  Committee  showing  the  dealings  on  the 
Exchange  in  the  shares  of  various  corporations  month  by 
month  since  1906,  which  corporations  were  the  United  States 
Steel  Corporation,  The  Eeading  Company,  the  Erie  Eailroad 
Company,  the  Rock  Island   Company,  the   Consolidated  Gas 


98 

Company,  the  Union  Pacific  Kailroad  Company,  the  Columbus 
and  Hocking  Coal  and  Iron  Company,  the  American  Can  Com- 
pany, the  American  Smelting  and  Eefining  Company,  the 
Amalgamated  Copper  Company,  the  Colorado  Fuel  and  Iron 
Company,  the  Brooklyn  Kapid  Transit  Company,  the  California 
Petroleum  Company  and  the  Mexican  Petroleum  Company.  If 
we  turn  to  the  Pujo  Keport  we  see  that  those  charts  and  tables 
were  produced  not  to  show  manipulation  but  to  show  what  is 
called  "  unwholesome  "  speculation  (Pujo  K.,  pp.  42,  43,  44), 
Section  14  of  that  report  is  headed  "  Unwholesome  specula- 
tion "  :  it  is  in  that  section  that  the  tables  and  charts  are 
brought  forward  and  explained ;  and  the  conclusion  drawn 
from  them  is  that  they  show  an  •'*  excessive  and  indiscriminate 
speculation."  '  In  the  whole  of  that  sub-division  of  the  report 
there  is  not  a  word  said  about  manipulation  (Pujo  R.,  pp. 
42-46).  Section  15  of  the  Report  is  headed  *'  Manipulation," 
and  is  the  one  that  deals  with  that  subject,  and 
the  instances  there  referred  to  are  those  which 
have  been  mentioned — the  Columbus  and  Hocking 
Coal  and  Iron  Pool,  the  Rock  Island  episode,  and 
the  California  Petroleum  Company  matter  (Pujo  R.,  pp.  46- 
62).  This  shifting  of  his  position  at  the  last  moment  does  not 
help  his  case  as  it  is  so  clearly  an  effort  to  bolster  it  up  by 
bringing  to  its  support  charts,  tables  and  transactions  that  do 
not  at  all  bear  upon  manipulation.  The  same  is  true  of  his 
bringing  in  the  dealings  in  the  stock  of  the  Amalga- 
mated Copper  Company  shown  in  one  of  the  tables  and 
charts,  and  now  amplified  by  the  charge  that  the  price  of  cop- 
per metal  in  1906  and  1907  was  manipulated  by  the  United 
Metals  Selling  Company  in  aid  of  the  manipulation  of  the  stock 
of  the  Company  which  Mr.  Wolfson's  statement  shows  to  be 
entirely  without  substance.  As  we  have  shown  (R.,  pp.  532-534) 
these  charts  and  tables  and  the  transactions  in  the  stocks  of 
the  companies  mentioned  to  which  they  refer  show  specula- 
tion and  nothing  else  ;   not   "  unwholesome  "   speculation,  but 


99 

speculation  in  its  ordinary  and  accepted  sense  ;  and  Mr,  Unter- 
myer  distinctly  says  in  his  brief  that  "  this  hill  is  not  intended 
to  prohibit  speculation  "  (E.,  p.  629).  All  that  Mr.  TJntermyer 
says  in  his  argument  and  brief  about  the  prevalence  of 
manipulation  on  the  Exchange  is  untrue  with  respect  to  recent 
times,  and  grossly  exaggerated  as  to  any  time. 

(2)  Mr.  Untermyer  says  in  his  brief  of  the  attitude  of  the 
Exchange  towards  manipulation  (E.,  p.  640) : 

"  Manipulation  is  considered  legitimate  provided 
commissions  are  paid  at  both  ends  of  the  manipulated 
transaction." 

No  statement  could  be  more  unfounded.  That  is  not  and 
never  has  been  the  attitude  of  the  Exchange.  It  is  no  more 
true  to  say  that  it  has  been  than  to  say,  as  he  does,  that 
"  wash  sales  "  and  "  matched  orders  "  have  been  regarded  as 
"  legitimate  until  recent  years  "  (E.,  p.  618),  when  the  fact 
is  that  they  have  been  prohibited  by  the  constitution  of  the 
Exchange  for  over  fifty  years. 

The  true  attitude  of  the  Exchange  towards  manipulation  is 
set  forth  in  our  brief  (E.,  pp.  534-537),  and  need  not  be  re- 
peated here.  For  Mr.  Untermyer  to  say  that  the  persistent  atti- 
tude of  the  Exchange  has  been  to  defend,  retain  and  encourage 
manipulation  is  disproved  by  the  measures  taken  to  prevent  it, 
also  set  forth  in  detail  in  our  brief  (E.,  pp.  544-547),  down  to 
the  last  rules  denouncing  every  transaction  that  does  not  in- 
volve an  actual  change  of  ownership  of  the  securities  bought 
and  sold,  and  which  provide  for  a  Committee  to  watch  the 
daily  transactions  of  the  Exchange  to  detect  irregular,  im- 
proper or  manipulated  transactions. 


100 

XIII. 

Incorporation. 

Mr.  Untermyer  devotes  a  great  deal  of  space  to  what  pur- 
ports to  be  a  discussion  of  the  necessity  of  the  incorporation 
of  the  Exchange,  but  which  is  really  a  discussion  of  all  sorts 
of  matters  that  have  no  relation  whatsoever  to  the  sub- 
ject. The  one  fundamental  point  for  him  to  meet  he 
avoids.  That  point  is,  that  every  requirement  of  this  bill 
and  every  mode  of  regulation  that  has  been  suggested 
by  him  or  any  one  can  be  applied  to  an  unincorporated  ex- 
change as  well  as  to  one  that  is  incorporated,  and  therefore 
incorporation  is  not  essential  to  any  form  of  regulation. 
This  is  the  point  that  we  urged  and  elaborated  before  the 
Legislature  of  the  State  of  New  York  when  incorporation  was 
sought  there  and  denied,  and  which  has  been  urged  and  elab- 
orated before  this  Committee,  and  Mr.  Untermyer  does  not 
venture  to  answer  it.  Failing  to  do  so  his  whole  case  for 
incorporation  falls  to  the  ground. 


XIV. 

Conclasion. 

There  are  many  other  points  in  the  argument  and  brief  of 
Mr.  Untermyer  that  I  am  tempted  to  answer,  but  to  do  so 
would  unduly  extend  this  reply.  They  are  just  as  vulnerable 
as  those  that  have  been  noticed.  The  purpose  of  this  reply 
has  not  been  one  of  antagonism,  but  to  induce  careful  scrutiny 
of  Mr.  Untermyer's  criticisms  and  denunciations  of  the  Ex- 
change. That  scrutiny  the  Exchange  asks,  and  it  is  content 
to  be  judged  by  its  results. 

John  G.  Milburn, 
Counsel  for  the  New  York  Stock  Exchange. 

[11354] 


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